US markets suffer worst day since 2022

July 25, 2024 (MLN): Investors soured on the promise of artificial intelligence Wednesday, sparking a $1 trillion rout in the Nasdaq 100 Index as questions swirled over just how long it will take for the substantial investments in the technology to pay off, as Bloomberg reported.

The Nasdaq indexes tumbled more than 3% for the worst days since October 2022. The list of laggards was a who’s-who of AI technology darlings, led by semiconductor companies such as Nvidia Corp., Broadcom Inc., and Arm Holdings Plc.

The selloff was triggered by a middle-of-the-road earnings report from Alphabet Inc. late Tuesday that featured a bloated capital expense.

The company’s stock sank more than 5% for its worst performance since January. Tesla Inc. plunged more than 12% after Chief Executive Officer Elon Musk offered scant details about his company’s self-driving vehicle initiative.

“The overarching concern is, where is the ROI on all the AI infrastructure spending?” said Alec Young, chief investment strategist at Mapsignals. “There’s a pretty insane amount of money being spent. Maybe it’ll pay off in a few years. But I think investors realize that the payoff is going to take time to materialize and the hyper scalers earnings are being hurt in the short term by how much they’re spending on it.”

As a result, traders are now paying more to protect against swings in tech. Options volatility on Nvidia rose to the highest level since mid-March, and the premium for puts on Broadcom Inc. is at a three-month high.

The rout comes two weeks after a cooler-than-expected inflation reading set off a massive rotation from tech winners into companies that would benefit most from Federal Reserve rate cuts, primarily small capitalization stocks.

For a fourth straight session — and the 10th time in 11 days — small caps’ performance exceeded that of their larger brethren on Wednesday. The Russell 2000 is up 0.5% this week compared with a loss of 1.5% in the S&P 500 and 2.6% in the Nasdaq 100.

The makers of hardware used in AI computing suffered some of the biggest drops on Wednesday after soaring this year.

Super Micro Computer Inc. dropped 9.15%. Nvidia fell 6.8%, and Broadcom Inc. lost 7.6%. Megacaps also retreated, as Meta Platforms Inc. declined 5.6%, Microsoft Corp. slid 3.6%, and Apple Inc. dropped 2.9%.

While Alphabet’s results dimmed hopes that AI would be a bigger contributor to financial results for megacaps, investors have yet to hear from the rest of the cohort.

Microsoft Corp. is scheduled to report on July 30, followed by Meta Platforms Inc., Apple Inc., and Amazon.com Inc. later in the week. Nvidia, the biggest beneficiary of AI spending, will be the last to report on August 28.

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