Wall Street’s love affair with artificial intelligence hit a hard pause on Tuesday, as investors dumped high-flying tech names and erased more than $500 billion in market value in a single day.
At the epicenter of the sell-off was Palantir Technologies Inc (NASDAQ:PLTR), with a 9% plunge that came despite upbeat earnings and raised guidance — a sign that even strong fundamentals can’t offset valuation fatigue after a 170% rally in less than a year.
• PLTR is facing resistance from sellers. Track the latest developments here.
Entering Monday’s session up 40% this year, Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ) was at an all-time high. A popular benchmark for AI exposure, the ETF tumbled 3.7% on Tuesday after its top holdings, from NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) to Amazon.com Inc (NASDAQ:AMZN) and Oracle Corp (NYSE:ORCL), shed tens of billions in aggregate value.
AI ETFs Feel The Heat
AIQ was hardly alone in the pain. The Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) retreated about 3% to illustrate just how concentrated AI bets are being unwound. Leveraged products linked to the theme were hit even harder. Direxion Daily AI & Big Data Bull 2X Shares (NYSE:AIBU) tumbled more than 7% as traders shed momentum-heavy trades.
Valuation Jitters Return
The rout on Tuesday was arguably less a story of earnings disappointment and more a case of gravity finally catching up to frothy valuations.
The Shiller CAPE ratio, a long-term measure of market valuation, breached 40 for the first time since the dot-com bubble. History has shown that levels like these are often followed by a decade of meager returns. Phil Wool, chief research officer at Rayliant Research, said that today’s valuations may be a good predictor of longer-term stock market performance. He highlighted international equities, such as those represented by the Vanguard Tax Managed Fund FTSE Developed Markets ETF (NYSE:VEA) and the iShares MSCI EAFE Value ETF (BATS:EFV), as more fairly valued relative to their history.
The Bottom Line
For now, the AI trade isn’t dead, but it’s definitely winded. Coming off a year of euphoric gains, investors in AI-focused ETFs like AIQ are confronting the uncomfortable truth that even the smartest algorithms can’t outthink a market correction.
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