What happens when the AI stock market bubble bursts?
The hottest stocks in the market – Apple, Nvidia, and Meta – reflect the hype from past crashes. Will AI optimism crumble soon?
U.S. stocks soared, with the blue-chip Dow Jones Industrial Average closing more than 1,000 points lower.
Stocks opened higher, with the Dow Jones Industrial Average rising 700 points, buoyed by strong earnings from artificial intelligence chip giant Nvidia and discount retailer Walmart. But stocks began to lose steam after the delayed September jobs report appeared to dash hopes of another rate cut from the Federal Reserve next month.
At the close of trading, the Dow Jones Industrial Average fell 386.51 points, or 0.84%, to 45,752.26. The tech-heavy Nasdaq fell 486.181 points, or 2.16%, to close at 22,078.048, while the S&P 500 Index fell 103.40 points, or 1.56%, to 6,538.76. The benchmark 10-year bond yield fell to 4.098%.
The jobs report was originally scheduled to be released in early October but was postponed due to the 43-day government shutdown, with payrolls increasing by 119,000 in September and the unemployment rate rising by a tenth to 4.4%. The figure was well above the 51,000 new jobs expected by some economists, but the picture was made more complicated by the fact that employment growth for July and August was revised down by 33,000 jobs.
“Given the Fed’s recent hawkish turn and the lack of official data scheduled before (the Dec. 10 meeting), it’s understandable that markets believe the next move won’t be made until early 2026,” said James Knightley, chief international economist at Dutch bank ING.
The CME FedWatch tool, which measures the likelihood that investors expect interest rate changes, shows there is a nearly 40% chance of a rate cut in December.
What is an AI bubble?
Despite the recent hype about an AI bubble, many analysts said they don’t think it’s an AI bubble.
“The bubble question that some have suggested is easy to refute,” said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments. “After all, stocks ultimately trade on earnings after the headlines die down.”
And NVIDIA’s revenue proved to be significantly lower, analysts said.
“NVIDIA’s vast knowledge and intellectual property moat puts it well ahead of its competitors in this space,” said Mark Marek, chief investment officer at Sievert Financial. “Whether by design or by chance, NVIDIA delivers the right product at the right time. NVIDIA’s earnings have not only been good, they’ve been ‘told you so’.”
In fact, Kristi Akrian, BlackRock’s head of iShares investment strategy for the Americas, said corporate earnings were strong across the board.
“Going into the third quarter, analysts were expecting earnings growth to be only 6%,” he said. “Now that NVIDIA has released its results, we can confidently report that our actual performance was more than double that, making it our strongest quarter since the last three months of 2021.”
Why is the stock market falling?
Analysts said uncertainty is the stock market’s worst friend. Although Nvidia’s results put some of the talk of an AI bubble to rest, the outlook remains cloudy, they said.
“Investors looking for an explanation for the current market decline should look no further than the recent re-emergence of uncertainty,” said Brett Kenwell, US investment analyst at trading platform eToro. “Questions surrounding the Fed’s interest rate path, the labor market, legal rulings on tariffs, and government shutdowns are just a few of them. Markets don’t like uncertainty, and when uncertainty rises, volatility often follows.”
He said the biggest problem is that the market ignores the health of the economy.
“Not only have investors and the Fed been forced to miss most major economic reports for more than a month, but the picture we are receiving is incomplete, making it difficult to get an accurate picture of the economy,” Kenwell said.
The government said it would no longer release employment statistics for October because data could not be collected last month due to the government shutdown.
Can Santa bring stocks out of the doldrums?
No one can say for sure whether the market will rise again soon, but stocks have a history. Mr Kenwell said the market was entering a “typically strong season” period.
Historically, stock prices have risen at the end of the year, giving rise to the term “Santa Claus Rally.” From the day after Christmas through the first two business days of January, the Dow Jones Industrial Average rose 77%. Since 1950, the S&P 500 has had a positive return 79% of the time over this period, with an average return of 1.3%.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
