The Dow Jones Industrial Average plunged nearly 500 points, or 1.1%, Tuesday as fears over an AI bubble shook the market and traders fretted that rate cuts from the Federal Reserve aren’t a sure thing.
It was fourth straight decline for the blue-chip index and the S&P 500, which dipped 0.8%. The tech-heavy Nasdaq slid 1.2% as investors panicked over whether AI firms have been overvalued – extending a rocky tech rout into its third week.
Shares in Nvidia fell nearly 3%. The chipmaker is reporting its third-quarter results on Wednesday, toward the end of an especially upbeat earnings season.
But “Magnificent 7” tech stocks have dropped amid fears that AI enthusiasm is reminiscent of the “dot-com bubble” of the 1990s and early 2000s.
Amazon, Microsoft and Meta also fell.
“All technology revolutions create bubble-like stock price performance – but this bubble is still inflating at a healthy pace with no signs of popping anytime soon,” James Denmert, chief investment officer at Main Street Research, said in a note Tuesday.
“Valuations, while expensive, still trade at discounts to earnings growth rates and overall AI market sentiment is mildly bullish and not euphoric.”
Odds of a quarter-point cut at the Fed’s December meeting plunged to just over 50% – down from more than 90% this time last month, according to CME FedWatch, which tracks Fed Funds futures prices.
Investors are looking ahead to the release of Fed minutes on Wednesday. The September jobs report, which was delayed by the government shutdown, is due out Thursday.
Despite the upcoming data releases, which are key to the Fed’s decision-making process, several officials have continued to advocate for a slower rate-cutting pace.
That has spooked investors who are eager for low interest rates – sending gold futures down 0.3% to $4,062 for its fourth straight day of declines.
Meanwhile, Anthropic on Tuesday announced plans to buy $30 billion of Azure compute capacity from Microsoft as part of a new strategic deal.
Microsoft will invest $5 billion into Anthropic, and Nvidia will give $10 billion to the startup as part of the deal.
While massive AI partnerships would usually send stocks soaring, both Microsoft and Nvidia saw big losses. Anthropic is a private company.
Further adding to fears of an AI bubble, Alphabet CEO Sundar Pichai told BBC on Tuesday that there is some “irrationality” in the current AI boom.
In the case of an AI bubble bursting, “I think no company is going to be immune, including us,” Pichai said.
Bitcoin dropped briefly below $90,000 on Tuesday. Many tech investors with substantial AI holdings also own cryptocurrency. By about 12:52 p.m., the cryptocurrency jumped 1.3% to $93,249.46.
Shares in Home Depot plummeted 6% after the company cut its full-year profit forecast and missed earnings estimates as inflation-battered consumers hold off on renovations.
While a November pullback is unusual, it could set up the stock market for a strong December and end to the year, Denmert said in his note.
In the previous trading session, the 30-stock Dow fell more than 550 points, while the S&P 500 and Nasdaq each dropped about 0.9%.
The tech-heavy Nasdaq appears on track to break its seven-month streak of gains.
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