The tech-heavy Nasdaq composite index experienced its worst week in over a year as a selloff in artificial intelligence and semiconductor stocks led to steep losses across the market. Growing skepticism around the AI frenzy and disappointing guidance from major players sparked the brutal rout.
The Dow Jones Industrial Average managed a fractional 0.01% gain, but the S&P 500 plunged 3.05% and the Nasdaq composite tumbled 5.5% – its biggest weekly decline since November 2022. The sell-off abruptly ended the market’s powerful uptrend that had been in force since November.
At the epicenter of the carnage were the white-hot AI and chip stocks that had been leading the rally over the last several months. Nvidia, the poster child of the AI boom, plummeted 13.6% for the week, giving up over two-thirds of its gains since blowout earnings in late February. The semiconductor maker’s stock knifed through its 50-day moving average on heavy volume Friday.
“Nvidia was the ultimate leader, and to see it reverse so violently raises major questions about the health and sustainability of the AI frenzy,” said Jack DeGrim, chief investment officer at HawkView Wealth Advisory. “When leaders start to crack, it’s a bright neon sign flashing that the broader uptrend is in jeopardy.”
Nvidia’s trillion-dollar rout came after bearish commentary from chip equipment giant ASML and Taiwan Semiconductor Manufacturing, two other pivotal AI plays. ASML shares dove 10.6% on the week due to weak sales guidance, while Taiwan Semi stock plunged 10.4% despite beating estimates.
But the real shocker was the implosion of AI server maker Super Micro Computer. Its stock cratered 23.1% on Friday alone – and 20.6% for the week – after failing to provide preliminary quarterly results, leaving investors fearful about potential issues with AI hardware demand.
“When a highflier like Super Micro doesn’t give you the numbers days before earnings, that’s a massive red flag,” said Cristina Fernández, director of research at Telometric Capital. “That stoked concerns that orders are maybe drying up across the AI supply chain after months of euphoric projections.”
The violent reversal in AI and semiconductor stocks was the primary driver behind the Nasdaq’s worst weekly performance in well over a year. But it also reflected growing investor angst about the hype cycle around AI going too far, too fast – emboldened by cautious guidance from semiconductor titans.
While still expressing optimism about AI’s transformative potential, Taiwan Semi CEO C.C. Wei warned the industry may be getting ahead of itself. “Companies need to be careful about blinding following the AI hype without seriously assessing if their business can successfully implement these complex technologies and generate a solid return,” Wei said on the company’s earnings call.
Meanwhile, ASML CEO Peter Wennink said AI demand represented “more of a futures consideration than current reality,” adding that while his company was investing heavily to capitalize on the AI opportunity, customer orders were currently focused on more mainstream applications.
The sober commentary from ASML and Taiwan Semi represented a stark contrast to the AI euphoria that has gripped markets in recent months. Nvidia had skyrocketed nearly 90% this year heading into the week on expectations that robust demand for its chips would power blowout growth. But the selloff has eliminated nearly $300 billion in shareholder value since last Friday.
“Investors got way too exuberant too fast on AI and started pricing in perpetual, exponential growth rates that defied reality,” said Fernandez. “The reversal in these highfliers is a cautionary tale about the dangers of hype cycles in financial markets.”
Compounding the AI-induced angst were fresh price cuts from Tesla, adding to concerns about slowing demand for the electric automaker’s vehicles. Over the weekend, Tesla announced reductions of up to $3,200 for its Model 3 in key European markets, while slashing prices on other models by $2,000 in both the U.S. and China.
The price cuts come ahead of Tesla’s earnings report this week and represented the latest in a series of incentive boosts by CEO Elon Musk aimed at juicing demand. Tesla also cut the price of its Full Self-Driving software from $12,000 to $8,000 as the company struggles with missed production targets and increased competition.
“The steady drumbeat of Tesla’s price cuts in market after market are a clear sign that demand is not meeting Musk’s expectations and inventories are piling up,” said DeGrim. “Investors are rightfully worried about the state of Tesla’s growth story heading into earnings.”
Tesla shares have plunged to new 52-week lows, losing nearly half their value amid a steady stream of negative catalysts. In addition to the price cuts, Musk reportedly shelved plans for the next-gen Tesla Model 2, opting instead to leverage the company’s existing vehicle platforms. That added to fears that the company will struggle to reaccelerate growth while contending with intensifying competition from legacy automakers like Ford and GM in the EV space.
“It’s a perfect storm of bad news for Tesla that has the Street questioning whether the company’s dominance of the EV market is more tenuous than expected,” DeGrim said. “Failure to deliver on Musk’s ambitious growth targets could trigger another wave of selling.”
Looking ahead, investors will closely monitor a deluge of high-profile tech earnings this week from the likes of Microsoft, Alphabet, Meta Platforms and ServiceNow. Guidance from these industry bellwethers will help shape expectations around AI adoption, software spending and the overall health of the economically-sensitive tech sector.
Should earnings and forecasts from these heavyweights exacerbate existing fears about a potential growth slowdown, it could exacerbate the market’s downturn. With many growth stocks already violated key technical support levels, even a hint of negativity from marquee names could unleash another bout of indiscriminate selling.
At this point, caution is warranted until there are clear signs the selling pressure has been exhausted across both the major indexes and leading tech stocks and the overall market’s uptrend can resume.
“We’re removing risk until the market has clearly found a bottom and begun consolidating in a calmer fashion,” said Fernandez. “Until leading stocks regain their footing and form bullish bases, it’s wise for most investors to move to the safety of cash.”
