US tech stocks slide as traders fret over ‘frothy’ AI valuations

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US tech stocks sold off on Tuesday as worries mounted over high valuations for artificial intelligence companies and investors braced themselves for earnings later this week from industry titan Nvidia.

The tech-heavy Nasdaq Composite dropped 1 per cent in choppy trading, while the broader S&P 500 slipped 0.6 per cent.

Companies at the centre of this year’s AI boom were among the biggest fallers on Wall Street. Chipmaker Nvidia fell 2 per cent, while Microsoft and Amazon fell more than 3 per cent and Meta dropped 1.5 per cent.

Stock markets globally have risen sharply this year, but the rally has stalled as a growing number of investors warn that lofty valuations of leading US AI stocks are becoming detached from the fundamentals. 

“There’s no question, we’re getting to a more late-cycle stage [of the market rally],” said Johanna Kyrklund, group chief investment officer at Schroders, pointing to “extended valuations” and a “frothy, somewhat bubble environment”. 

“We still have exposure to these stocks,” Kyrklund said, but added: “I wouldn’t advocate a passive exposure to this [AI] space at the moment.”

Since September, Amazon, Alphabet, Meta and Oracle have issued a combined $81bn of debt to fund the build-out of AI data centres, according to Bank of America calculations.

But traders are increasingly circumspect about Big Tech’s investment spree and are no longer “blindly rewarding” the hyperscalers’ huge spending commitments, said Charlie McElligott, a strategist at Nomura.

A closely watched survey of fund managers showed on Tuesday that a majority of investors think companies are overinvesting — the first time this has been a majority view in data going back to 2005.

“Concerns are mounting over the sheer scale of AI-related capital expenditure and whether monetisation and productivity gains can keep pace,” said Daniel White, head of global equities at M&G, pointing to some estimates putting AI capex at about $7tn of cumulative spending by 2030. 

Daniel Pinto, vice-chair of JPMorgan Chase, on Tuesday flagged the risk of a possible market “correction” for some of the Big Tech companies ploughing vast sums into building AI data centres. 

“To justify these valuations, you are considering a level of productivity that will happen, but it may not happen as fast as the market is pricing,” Pinto told a Bloomberg conference.

Investors said Nvidia’s earnings announcement, due on Wednesday, would be a key moment for markets. Peter Thiel’s hedge fund, Thiel Macro, dropped its entire exposure to Nvidia in the third quarter, according to recent filings that gave a snapshot of holdings at the end of September. 

“The renewed sell-off in US tech stocks puts even more of a spotlight on the earnings report of AI bellwether Nvidia,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. “It will set the tone for the wider tech sector over the coming few weeks into the year-end.”

The Nasdaq has fallen more than 5 per cent so far in November, putting it on track for its first monthly fall since March, when the scale of US President Donald Trump’s tariff regime sent shockwaves through markets. 

The Vix index, Wall Street’s so-called “fear gauge”, jumped 11 per cent on Tuesday to 25, above its long-term average.

European and Asian stocks also dropped on Tuesday. The Stoxx Europe 600 was 2.1 per cent lower by mid-afternoon on Tuesday and Germany’s Dax fell 1.8 per cent. 

The tech-heavy South Korean Kospi index fell 3.3 per cent and the Hang Seng in Hong Kong shed 1.7 per cent.

Investors will also be watching the September US jobs report on Thursday, which was delayed by the longest-ever shutdown of the federal government.

The December Federal Reserve decision is now on a knife edge, with traders divided 50-50 about whether the US central bank will cut or hold interest rates, compared with expectations a month ago that a cut was nearly assured.

Higher rates tend to be negative for fast-growing companies.

The market moves come as US DIY chain Home Depot warned on Tuesday that economic uncertainty was weighing on its sales. Its shares slid 4 per cent.

Government bonds rallied as investors moved away from riskier assets. The yield on the 10-year US Treasury fell 0.04 percentage points to 4.1 per cent. Yields move inversely to prices.