(Reuters) – Wall Street’s main indexes slid on Tuesday, with the S&P 500 down more than 2% and the Nasdaq Composite down over 3% as investors softened their optimism about AI in a broad market sell-off following tepid economic data. The benchmark S&P 500 index, Nasdaq and Dow are on track for their biggest daily declines since early August.
Shares of chip stocks were hard hit, with AI heavyweight Nvidia tumbling nearly 10% and Wall Street’s chip index the PHLX chip index slumping 8%.
TODD SOHN, ETF STRATEGIST, STRATEGAS LLC, NEW YORK:
“Such a massive amount of money has gone to tech and semiconductors in the last 12 months that the trade is completely skewed. Since the Fed paused rate increases a year ago, more than $30 billion has flowed into U.S. technology-related ETFs; meanwhile all other sector ETFs lost $10 billion in the same time period. Tactical allocations go into those sector ETFs, and imbalances like this can persist for a while, but eventually, the steam runs out of the trade.
“Then there are the earnings – it’s also hard to keep beating those high expectations. Plus, now we have Broadcom’s results due Thursday. And if you put ten people in a room and asked them why this is happening, at least one would point to the election and the possibility that a new administration would do something to tariffs that would affect chips.
“Finally, while it wouldn’t be at the top of my list, there’s the calendar. People may have woken up this morning and realized it’s September, which historically is not a great month for stocks. Add to that the fact that so far this year the largest drawdown we’ve seen in the S&P 500 is about 8%, and that typically we’d see something around 14%, people are nervous.”
STEVE SOSNICK, MARKET STRATEGIST, INTERACTIVE BROKERS, GREENWICH, CT.
“There’s a bit of a post-Nvidia earnings hangover going on today. Those earnings last week were fine; they exceeded expectations. But the magnitude of the beats is shrinking quarter by quarter and that’s not lost on investors. The stock had rallied going into earnings – a huge amount of investment poured into it – and so it wasn’t just sufficient to be good, it had to be great. And Friday’s rally took place in remarkably light volume ahead of a long weekend that happened to coincide with the end of the month, so the typical markup that happens at the end of a calendar month met no resistance.
“This week is different, and so you’ve seen a nasty day. There’s concern about what the job numbers are going to show, about seasonality. That’s why the VIX is higher. I don’t think the ISM number, showing a weaker manufacturing sector but higher prices, was at all helpful. And there you have it. Gravity.”
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DENNIS DICK, TRADER AT TRIPLE D TRADING:
“If you look at the action on Friday, everything was rallying, but Nvidia was lagging. So, you could see the relative strength was poor after their earnings print. It hasn’t been good since then.”
“September is seasonally a very weak month of the year, so I think people are nervous. People are just using this as an excuse to take profits and the most likely candidates to take profits are the semis, because they’ve been the strongest.”
STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO:
“We ran right back up to the new high again. There was absolutely zero news over the weekend that meant anything to anybody. But here we are down 600 points.”
“They’re expensive. They’re not cheap stocks. I mean, wow, I don’t know what Nvidia needed to do in the quarter… It was a pretty freaking good quarter, a couple minor issues, but it just goes to show you these things are just very expensive.
“It also becomes a little bit of a self-fulfilling prophecy because so much money now flows into ETFs and so much money flows into S&P and target funds and all that. It just gets spread across the market and it gets spread across the market on a market cap weighted basis, so it sort of becomes a self-fulfilling prophecy. If you’re one of the top market cap names in the S&P 500 and all the money is pouring into S&P 500 ETFs funds, how does that not help you? And I think that’s part of it, and that’s part of why you get these stretched valuations.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, BROOKFIELD, WI
“People are worrying and thinking about all kinds of macro issues. Has the Fed fumbled the ball? The fear is that it is tripping over its own feet when it comes to the timing and pace of rate cuts instead of sticking the landing. Will the jobs report increase the odds of a recession? The biggest thing here is the possibility that investors will sell what has gone up the most in the face of any softening.”
SCOTT WREN, SENIOR GLOBAL MARKET STRATEGIST AT WELLS FARGO INVESTMENT INSTITUTE
“We came in with the futures down but once this ISM number came out it triggered this fall.”
“The market is worried about how drastic the slowdown is going to be. The tech sector, even with this pullback we’ve had today, it’s still up a lot for the year and these things have moved a lot. These stocks led the chart up and on down days they will lead the chart down. When you look at something like 2/10 inversions the last 8 recessions curve has gone positive before recession occurs and we’re only a few basis points away. The market is thinking about that too.”
MICHAEL GREEN, PORTFOLIO MANAGER, SIMPLIFY, SAN FRANCISCO BAY AREA
“People are over allocated to Nvidia and many of these names and they’re trying to reduce that exposure. It just has the potential for these things to sell off quite significantly”
“I also think there is a derisking related to election as the election season officially starts now when people are back from Labor Day and everybody is off the beach. Everybody looked at their portfolios and said that going into the political uncertainty of a tight election, we want to have less risk. The PMI report was an excuse for that.”
CALLIE COX, CHIEF MARKET STRATEGIST, RITHOLTZ WEALTH MANAGEMENT, NEW YORK
“Stocks are starting the fall off on a sour note, yet it’s hard to say exactly why people are selling today. Tech is dragging the index down, with Nvidia accounting for about a third of the S&P 500’s losses. We saw a manufacturing report come out this morning that suggests goods demand is slowing. But it wasn’t shockingly bad data, and the narrative of slowing demand isn’t exactly surprising.
“I’d pin some of the drop on seasonality. September is typically a rough month of the year for the stock market – and the S&P 500 has fallen on the Tuesday after Labor Day every year since 2016. People may simply just be catching up to what they missed during the dog days of summer.
“Believe in this bull market, but shield yourself against rash decisions in what could be a turbulent fall. And don’t get distracted by short-term market swings. Since 1950, 60% of market selloffs haven’t reached correction territory, and 26% have ended before the dreaded bear market level.”
(Reporting by Suzanne McGee, Noel Randewich, Chuck Mikolajczak, Chibuike Oguh, David Randall, Laura Matthews and Carolina Mandl; Compiled by Megan Davies)
