Global markets were rattled on Tuesday as investors shifted their focus from the ongoing US conflict with Iran to concerns about the future of AI companies and semiconductor manufacturers, which have been pivotal in driving stock indices to unprecedented heights.
The Nasdaq, known for its tech-heavy composition, opened the day down 2%, with the Dow Jones Industrial Average and the S&P 500 also starting in the red.
This year, all three major US stock indices reached all-time highs, largely fueled by a surge in investments geared towards AI technology and its supporting infrastructure. The Nasdaq has gained 10% year-to-date, the Dow has seen a 6% increase, surpassing the 51,000-point threshold, and the S&P 500 is up by 7.3%.
However, economists are expressing caution, suggesting the current excitement around AI investments may be reminiscent of the dot-com bubble that collapsed in the early 2000s. Notably, seven tech firms account for a staggering 30% of the total value of the S&P 500.
The heavy dependence on a narrow group of companies within a single sector is causing unease among investors, who speculate about the potential for a market correction. These concerns have been intensified by recent hints from the Federal Reserve regarding possible interest rate hikes to combat inflation, indicating that borrowing costs could rise.
Confirmation of a downturn seemed to emerge following a series of significant events on Monday. The sell-off began with a sharp decline in shares of Alphabet, Google's parent company, which faced its toughest trading day in over a year after losing two prominent AI researchers. By the end of Monday, Alphabet's stock had plummeted by 5%.
Meanwhile, SpaceX, which was welcomed to the market with excitement after its IPO on June 12, saw its shares tumble by 16% on Monday. The company announced plans to raise $20 billion through a bond sale, alarming investors about the sustainability of its high expenditure on projects despite previously amassing over $85 billion from its IPO.
Ipek Ozkardeskaya, a senior analyst at Swissquote, remarked that although SpaceX is not yet included in the Nasdaq indices, its move towards financing the hefty costs associated with AI and infrastructure through debt raises concerns over excessive spending in the sector. Morgan Stanley has projected that AI-related debt issuance could exceed $500 billion this year.
As the US stock market closed on Monday, Asian markets responded negatively to the declines in AI and tech stocks. South Korea's benchmark index fell 10% on Tuesday, impacted by major chipmakers like SK Hynix and Samsung Electronics, which both experienced drops of over 12%. Japan's Nikkei 225 also suffered a setback, closing down 3.5%.
