AI Tech Stock Sell Off Sees One Trillion Dollars Wiped Off US Markets as Bubble Fears Grow

The United States stock market has endured a volatile week, as a sell-off in major technology companies wiped $1 trillion from market capitalisation in just four days. The S and P 500 index ended Wednesday down for the fourth consecutive session, pressured by mounting concerns that the artificial intelligence driven rally in tech shares could be approaching its limits. Early trading on the Nasdaq saw the tech-heavy index fall up to 1.8 percent, translating into its sharpest sell-off since April and a 7 percent decline over the week.

This dramatic fall has largely been triggered by worries that artificial intelligence companies may be severely overvalued. Recent claims suggest many have little to show for the vast sums invested in AI products and infrastructure. For example, Nvidia, the world’s most valuable public company with a four trillion dollar valuation, saw its shares drop as much as 3.3 percent on Wednesday before a partial recovery, still down close to 5 percent since Monday. Data analysis firm Palantir witnessed a six percent drop, with its stock value plunging by as much as a fifth over the past six days. Intel, the leading chipmaker, lost over 7 percent of its share value while UK giant Arm slipped by 3.6 percent.

A pivotal factor was a recent MIT report which found that 95 percent of corporate AI projects are generating zero return for their respective companies. This research has punctured some of the optimism that has driven the tech rally since the debut of ChatGPT in 2022. Despite the immense hype and billions invested, the so-called AI revolution is not yet realising major financial gains for most businesses. Only a handful of firms reported significant profit and loss impact from integrated AI pilots.

It is not just American firms suffering. The AI sell-off also hit Japanese and European technology stocks. Shares in major companies such as Taiwan Semiconductor Manufacturing Company dropped 4.2 percent, Infineon was down 1.6 percent, and ASML slipped 0.64 percent. SoftBank of Japan, a significant OpenAI investor, fell seven percent following reports of further planned investments in the AI sector.

Market sentiment has been further dampened by concerns over potential government intervention in the US tech sector. The US Commerce Secretary recently stated an intention to take stakes in chip companies such as Intel in exchange for grants aimed at expanding domestic manufacturing capacity. News of this move exacerbated the fall in Intel’s share price, which plunged nearly nine percent.

Despite these doldrums, some analysts urge caution against hasty selling. There remains confidence in the underlying earnings power of top technology firms, which are believed to be getting more efficient at monetising AI capabilities. However, the spectre of an overheated market and mean reversion looms large, especially in August, traditionally one of the most turbulent months for stock performance as trading activity typically drops and volatility rises.

Much now depends on potential signals from the US Federal Reserve, particularly with an expected address from Fed Chair Jay Powell at the Jackson Hole symposium. Hints at an interest rate cut at the next Federal Open Market Committee meeting could swiftly reverse the recent rout in technology stocks, according to some financial experts.