Artificial intelligence stocks powering much of 2024's market gains dropped Monday as U.S. recession fears sparked a global sell-off on Wall Street, and concerns mounted over the return on investment for AI spending.
The sector declines come after Friday's disappointing July jobs report stoked recession concerns, and worries that the Federal Reserve is behind the curve on cutting interest rates to boost the economy. With investors in a risk-off mood, AI shares with high valuations were among the first dumped from portfolios.
"The demand is there, we're just not seeing it in exorbitant price action where these stocks are just going to continue to run up," said Jay Woods, chief global strategist at Freedom Capital Markets. "We've gotten a pause, and now we've gotten a little fear thrown in because of external factors. What we're seeing is a correction."
Nvidia and Super Micro Computer lost 6% and 2%, respectively, after dropping as much as 14% earlier in the session. As of Monday's open, Nvidia sat more than 30% off its highs, while Super Micro had already lost more than half its value.
Contagion spread to the broader sector, with the VanEck Semiconductor Index declining 2% to build on a 5.5% loss from Friday. The sector is also coming off a "less than inspiring start" to earnings, noted Jefferies' trading desk. Micron Technology dropped and Arm Holdings dropped more than 2% each, while Taiwan Semiconductor Manufacturing slipped 1%.
Megacap technology stocks also sold off, with Meta Platforms and Microsoft falling more than 2% and 3%, respectively. Alphabet and Tesla declined 4% along with Amazon. Apple shed nearly 5%. Warren Buffett's Berkshire Hathaway revealed over the weekend that it dumped nearly half its stake in the iPhone maker. The Roundhill Magnificent Seven ETF fell nearly 4%.
Major technology stocks — with the exception of Nvidia — wrapped up a busy earnings stretch last week. Some results fueled skepticism that hefty investments on AI are taking longer than expected to pay off as capital expenditures and spending trudge higher.
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"AI tailwind has net net begun to falter as investors have started to lose patience on monetization timelines," wrote UBS strategist Maxwell Grinacoff. "We previously flagged that concentration risk in the theme has grown, with electrification companies to copper miners to data centers getting sucked into its wake."
The Information also reported over the weekend that Nvidia is delaying its latest AI chip by three months, which could affect megacap customers such as Meta Platforms and Microsoft. Investors seemed to buy Advanced Micro Devices amid the news, boosting shares nearly 2%.
Monday's sell-off also comes on the heels of a rocky July for technology shares. Nvidia, Alphabet and Meta Platforms pulled back more than 5%, while Microsoft dropped more than 6%.
