The AI narrative that has long supported tech stock valuations is now facing reality checks.
On Tuesday, US technology stocks experienced their most severe selloff in months, bringing an abrupt halt to the strong rally driven by AI enthusiasm.
Market skepticism about AI commercialization returns, combined with bubble warnings from industry leaders, provided the market with reasons for decline, leading investors to flee from high-momentum tech stocks.
During this correction, the tech-heavy Nasdaq Composite Index closed down 1.4%, marking its largest single-day decline since August 1st. Chip giant Nvidia fell 3.5%, while software company Palantir and chip design firm Arm plummeted 9.4% and 5% respectively. The S&P 500 also closed lower by 0.7%.
This pullback comes amid growing concerns about tech stocks' high valuations. According to Bloomberg data, the Nasdaq 100 Index trades at a forward price-to-earnings ratio of 27 times, nearly one-third above its long-term average.
The immediate catalyst triggering market anxiety was a report released Monday by a research arm of the Massachusetts Institute of Technology (MIT). The report stated that as many as "95% of organizations have achieved zero returns on their generative AI investments," and "only 5% of integrated AI pilot projects have generated millions of dollars in value."
Meanwhile, OpenAI CEO Sam Altman recently stated publicly that he believes investors are "overly excited" about AI, suggesting a bubble may be forming and some investors "could lose a lot of money."
These negative signals quickly spread, dampening market optimism. A trader close to a multi-billion-dollar US tech fund stated bluntly: "This (MIT) report spooked people."
Alongside the decline in AI concept stocks, risk assets broadly came under pressure, with Bitcoin falling 2.7%, dragging down related cryptocurrency stocks. Capital clearly flowed from tech sectors to defensive sectors, with the Dow outperforming tech stocks on four of the past five trading days.
**Bubble Warnings and Return Doubts: Dual Negatives Trigger Selloff**
The AI story that has long supported tech stock valuations is now facing reality tests.
The MIT report's conclusions are particularly sharp, with findings that "the vast majority (of AI projects) have yet to generate measurable (profit) impact" directly challenging market expectations that AI will quickly translate into corporate earnings.
Altman has also issued warnings about an AI bubble. As the "standard-bearer" of this AI wave, he compared current euphoria to the dot-com bubble, believing history is repeating itself.
He told media: "When bubbles happen, smart people get overly excited about a kernel of truth." While acknowledging the importance of the internet, he pointed out that "people got overly excited."
Although he also expressed tremendous confidence in AI's long-term value, his warning that "someone is going to lose a staggering amount of money" undoubtedly intensified investors' short-term concerns.
Analysts believe these messages collectively "spooked" market participants, becoming key factors triggering the selloff.
**"High Momentum" Trading Ebbs, Tech Leaders Fall Broadly**
Tuesday's decline concentrated on the year's strongest-performing "high momentum" stocks.
Since mid-May, the S&P 500 Information Technology sub-index has risen 14%, with AI-related companies contributing significantly.
However, Tuesday's leaders in decline were precisely these former stars.
Besides Nvidia, Palantir, and Arm, Oracle and Advanced Micro Devices (AMD), two large-cap stocks that have been top performers since mid-May, also fell 5.9% and 5.4% respectively. Advertising technology company AppLovin similarly declined 5.9%. According to Bloomberg data, tech giant combinations including the "Mag7," as well as popular momentum stocks and retail favorites, all suffered significant hits.
Over the past five days, Mag7 stocks have fallen sharply, while the S&P 493 index remained essentially flat.
Jacob Sonnenberg, portfolio manager at Irving Investors, commented: "The market has been in a hot state—today you saw money rotating out of many very hot, high-momentum stocks." This indicates the market decline wasn't indiscriminate selling, but rather concentrated profit-taking and style switching.
**Risk Aversion Rising, Capital Flows to Defensive Sectors**
While tech stocks faced selling pressure, the market's other side showed clear risk-averse characteristics. Capital flowed out of high-risk tech sectors toward traditionally defensive areas, with consumer staples, utilities, and real estate sectors rising against the trend.
In fact, about 70% of S&P 500 index components closed higher that day, highlighting the structural nature of this decline.
The bond market also confirmed this trend. As risk assets came under pressure, US Treasury prices rose and yields declined accordingly.
Meanwhile, other risk assets weren't spared either. Bitcoin prices fell, hitting near three-week lows, breaking below the 50-day moving average for the first time since June. As overall market risk appetite declined, gold and oil prices also fell.
**Investor Sensitivity Highlighted**
This isn't the first time markets have shown sensitivity to potential AI risks.
In January this year, Chinese AI company DeepSeek's announcement of a technological breakthrough caused brief market turbulence, as it appeared to achieve superior performance with significantly lower computing power than US competitors, once raising questions about US companies' AI dominance and chip demand. Although markets quickly recovered then, this event already demonstrated investors' high vigilance toward any negative AI-related news.
Looking ahead, markets are closely watching key upcoming events.
The Jackson Hole Global Central Bank Symposium, featuring Federal Reserve officials, and AI chip leader Nvidia's earnings release will become the next important test of market sentiment. Investor attention will focus on the Fed Chairman's speech and whether Nvidia can reignite market confidence in AI through its performance and guidance.
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