European stocks retreat on tech valuation concerns; U.K. economic woes
Investing.com -- U.S. equities saw a sharp reversal on Thursday, with major indexes sliding into the close after an early rally, as mixed jobs data and renewed AI-bubble worries overshadowed the lift from Nvidia’s stronger-than-expected earnings.
The reversal left the Nasdaq at its weakest close since September 11 and pushed the S&P 500 to its lowest since September 10. Volatility spiked, with the VIX hitting its highest close since late April.
Nvidia, up as much as 5% in early trading, finished down 3.2%, and an index of semiconductor shares slid 4.8%. Both the Nasdaq and Dow saw intraday swings of more than 1,000 points, marking one of the biggest intraday sentiment shifts in months.
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Investment research firm Yardeni Research said the pullback they anticipated earlier in the month had intensified into what may be the early stages of a full correction, especially for the Nasdaq.
In a note to clients, Yardeni outlined five forces behind the sudden bearish turn.
1) ‘AI bubble fears:’ Yardeni says “widespread uncertainty about the impact of AI infrastructure spending on the earnings of the AI data center corporations” is weighing heavily on sentiment.
Nvidia’s strong report did little to clear up what the note calls “known unknowns,” it noted.
“Also unnerving investors are recent reports that Softbank and Thiel Macro sold all their Nvidia shares. Michael Burry continues to raise doubts about the accounting practices of the major AI companies,” Yardeni added.
2) ‘Bitcoin’s freefall:’ Yardeni attributes part of the stock-market weakness to the sharp drop in Bitcoin.
The note highlights a strong correlation between Bitcoin and the leveraged Nasdaq-tracking ETF TQQQ, suggesting the crypto rout may be forcing some investors to unwind equity positions as well.
3) ‘Labor market & Fed concerns:’ The long-awaited jobs data, which was delayed due to the recent government shutdown, showed that payrolls rose 119,000 in September, more than twice the expected number, while the unemployment rate edged up to 4.4%.
Yardeni says the mixed signals have left investors uncertain about what the Federal Reserve will do at its December meeting.
“Stronger-than-expected employment reduces the likelihood of a Fed rate cut at the FOMC’s December 10 meeting,” Yardeni wrote, however, it added that the uptick in unemployment may push the committee to go ahead with another 25bps rate cut.
“Today’s talking Fed heads sounded cautious about doing so, adding to the stock market’s downdraft,” the note added.
4) ‘The economic growth question:’ Yardeni points to flat aggregate hours worked in recent months, even as real GDP has been running near 4%. The disconnect has unsettled some investors, though the firm believes upcoming productivity figures “should boost stock prices.”
5) ‘Low fires and low hires:’ Initial jobless claims remain low, but continuing claims have risen, meaning unemployed workers are staying jobless for longer. According to Yardeni, the combination “unsettled investors.”
All in all, despite the aforementioned concerns, Yardeni remains confident in the economy’s resilience, backed by productivity-led growth and solid earnings that should extend well into next year.
The firm said AI-related jitters may weigh on sentiment for a while, but could also create buying opportunities across both the Magnificent-7 and the broader market.
If the pullback becomes a full correction, their 7,000 year-end S&P 500 target may slip into early 2026, though the rapid turn in sentiment suggests the downturn should end soon, Yardeni said.