Wall Street’s surge to record highs this year in the face of war in the Middle East and spiralling borrowing costs has been powered by a single investment idea — a relentless boost to stocks from the AI boom. After weeks of warning signals from credit markets, that dominant market narrative spectacularly combusted on Thursday in a $3.2tn rout sparked by the political fallout from the US midterm elections.
The sell-off was fuelled, investors say, by a brutal unwind of leveraged tech positions that had built up among hedge funds — with some hacking back their exposure at the fastest rate since Covid-19 — and an exodus of retail investors. “It’s like a chemical reaction,” said one senior equities banker. “You have one, two, three elements, and then there’s an explosion. The election was the explosive element.”
The tech-heavy Nasdaq 100 fell more than 6 per cent on Thursday in one of the worst days on record for chip stocks, before rising 1.4 per cent on Friday to finish 4.9 per cent lower for the week. “The midterms ended the assumption of a blank cheque for AI,” said Ludovic Subran, chief investment officer of Germany’s Allianz. “The market just discovered that ‘the sky is the limit’ is not a valuation methodology.”
“The AI trade has been devalued,” said Nikhil Srinivasan, chief investment officer of a newly launched macro fund at Singapore-based Benzaiten Macro. Stocks “discount the future and the future beyond the next few years is now a question mark”, he added.
Source: Financial Times Markets · Summarized by HeadlinesBriefing