It’s not the first time this year that Wall Street is being put in a position with its back against the wall this year. But somehow, there is a different air of vulnerability to the latest selloff in tech shares than before this. In previous times, strong earnings was what came to the rescue for investors. This time around, it seems to be the case that even solid earnings isn’t enough anymore as AI spending fears are taking over.
After the brutal selloff in October, dip buyers are desperately looking for a reason to put their toes back into the water. But as the market mood feels more fragile by the day, every disappointing earnings report or fresh AI spending concern is threatening to send investors running for the exits.
And looking beneath the surface, there are warning signs that could suggest that the worst may not be over.
Firstly, there is the fact that one of the core components of the AI rally is still taking a very heavy beating. Semiconductor stocks have been slumping hard in the past month and there’s still no reprieve in recent sessions.
The Philadelphia Semiconductor Index slumped by 7.2% on Friday, with the selling continuing into Monday this week. That’s hardly encouraging when you consider the fact that chipmakers have been the backbone of the AI rally.
Intel’s disappointing outlook may have been the one to spark the latest rout, but the weakness has spread to the likes of Nvidia, AMD, and Broadcom. So until chip stocks find their feet, I’d be wary of trusting any meaningful Nasdaq recovery.
Secondly, there is the growing concern that Wall Street is losing patience with the whole AI spending bonanza. Amazon, Alphabet and Meta are continuing to pour enormous sums into AI infrastructure but investors seem to have about enough of that. Now, they are questioning more than ever as to when those investments will actually pay off.
Consider this, Amazon’s trailing 12-month free cash flow swung to negative $42.4 billion. That’s quite the price tag for chasing the AI dream.
Now, the issue here isn’t necessarily weak demand. It is simply the fact that spending is accelerating faster than investors are comfortable with, raising uncomfortable questions about returns on investment.
And thirdly, the market breadth isn’t offering much reassurance either. As of Monday’s close, only about 36% of Nasdaq-listed stocks were trading above their 50-day moving averages. That’s a very fragile foundation in trying to argue for a sustained recovery.
Now, the broader S&P 500 is holding up better with roughly two-thirds of its constituents above that same threshold. So, we’re still very much looking at a concentrated tech problem rather than any major outright market capitulation. That being said, the signs aren’t great especially if this keeps up for longer and threatens a spillover to broader stock sectors.
The next test now will be defined as a battle on multiple fronts. It will be a question of whether chipmakers can stabilise, whether AI spending fears will ease, and whether more stocks in the Nasdaq can join in on any recovery prospects.
So until we see better developments on all those fronts, I wouldn’t want to mistake any bounce for a clean bill of health in the market. If anything, the signs above are pointing to the fact that it may not take much to trigger yet another round of selling on Wall Street.
This article was written by Justin Low at investinglive.com.