(Reuters) – Wall Street’s main indexes fell on Tuesday, with the S&P 500 falling more than 2% and the Dow Jones Industrial Average falling more than 3%, as investors’ optimism about artificial intelligence faded in a broad market selloff that accelerated after tepid economic data. The Nasdaq and Dow posted their biggest daily declines since early August.
Chip stocks were hit hard, with AI giant Nvidia (NASDAQ:NVIDIA) down about 10% and Wall Street’s chip index (PHLX) down 8%.
Investors also pointed to concerns about this time of year, as September is widely considered one of the worst months for stock market performance.
Andrew Graham, Founder and Managing Partner, Jackson Square Capital, San Francisco
“Nvidia stock didn’t rise after its earnings announcement, so when people came back from vacation, it seemed like they decided to sell. That seems like a strange reason to me, but that’s part of the story. Nvidia was also trading sideways for most of the last quarter, which didn’t help sentiment, although it did create technical support at around $95 per share.”
“The other factor here is that all technological revolutions go through periods of frustration, and we are probably in the early stages of that with AI.”
Michael Aron, Chief Strategist, SPDR, State Street Global Advisors, Boston
“It’s not good enough when it comes to Nvidia’s earnings. There was enough of this quarter that wasn’t perfect to make people sell. More broadly, the S&P is up 20% since the end of August, and that’s just another excuse to take profits on tech as valuations are high and growth rates slow. There’s skepticism that all this spending on AI won’t pay off in higher revenues and earnings.”
“Then what happened here is a bit of a cliché; everyone is coming back from summer vacation, volumes are up, and it’s been a good performance in what has historically been a seasonally weak period. September has been a losing month for stocks in each of the last four years, and in six of the last 10.”
“So what I expect is that we will see a continued move away from tech stocks leading to a broader lead. This is happening because interest rates and inflation are coming down, and that should help close the gap in earnings growth between the tech sector and the rest of the market.”
Sam Stovall, Chief Investment Strategist, CFRA, New York
“I don’t think there was anything that caused people to sell today. I think investors just succumbed to seasonal volatility ahead of what they fear will be a double dose of election-year declines in both September and October, and piled into those stocks that had a lot of gains.”
“The only thing I saw that could have possibly undermined investor confidence was the ISM report. The report was supposed to show a rise in prices, but it actually showed a fall, which again made people wonder if the Fed was late to act.”
“This may be a short week, but it will be an important and crucial week for investor confidence, as people will remain on edge.”
JJ Kinahan, CEO of IG North America and President of Tasty Trade in Chicago
“The market’s decline today was obviously driven in part by the ISM numbers, which showed manufacturing fell for the fifth straight month. We had a bad day on August 5th, and sometimes investors go back to those bad days and get a little nervous, but it’s strange that we’re back on that day again almost a month later. Compare that to Friday, when we saw the S&P 500 at an all-time high and the Dow Jones notched its 26th record close of the year. After those highs, it’s not unusual to see a little bit of a squeeze. We know that this has been a ‘nervous rally’ since August 5th; there’s been a lot of chatter about September being the worst month in history and trying to live up to its name, so to speak.
“We saw a close above the 20 level, which shows you that investors are nervous – and the difference between today and that day in August is that today was a very gradual sell-off, as opposed to August which was crazy overnight and saw volatility explode.
“One thing to watch is the drop in crude oil prices below $70 today, which is easing inflationary pressures, but could now be an indicator of recessionary pressures.
“Another interesting thing we saw today was NVDA stock dropping almost 10%; while we were talking about the ‘AI rally’ it’s certainly not over yet, companies will have to show why all this investment in AI was worth it, and the AI revolution could happen if companies start cutting back on spending there.”
Carol Schleif, Chief Investment Officer at BMO Family Office in Minneapolis, Minnesota:
“September and October are notoriously volatile months for markets, especially in presidential election years. This year in particular, investors seem to be more concerned about the large swings in opinion polls and the rapidly changing potential outcomes.”
“It is not unusual for trading to start after Labor Day with a push in the opposite direction than what has generally been the case in the preceding summer months as people head to the office and start preparing for the push to the end of the year.”
Todd Son, ETF Strategist, Strategas, New York:
“There has been so much money going into technology and semiconductors in the past 12 months that the trade is completely skewed. Since the Fed stopped raising interest rates a year ago, more than $30 billion has flowed into U.S. technology ETFs; meanwhile, all other sector ETFs have lost $10 billion in the same time period. Tactical allocations are going into these sector ETFs, and imbalances like this can persist for a while, but eventually the trade runs out of steam.”
“Then there’s earnings — it’s also hard to keep beating these high expectations. Plus, we now have Broadcom’s results due out on Thursday. 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 the new administration might do something about tariffs that would impact chips.
“Finally, while the calendar wouldn’t be at the top of my list, people woke up this morning and realized that we’re in September, which is historically not a good month for stocks. Add to that the fact that the biggest decline we’ve seen so far in the S&P 500 this year was about 8%, and we usually see something like 14%, and it makes people nervous.”
Steve Sosnick, Market Strategist, Interactive Brokers, Greenwich, Connecticut.
“There are some implications for Nvidia’s earnings today. Last week’s earnings were good; they beat expectations. But the volatility is diminishing quarter by quarter and that’s no secret to investors. The stock was up ahead of the earnings announcement — a huge amount of money was invested in it — so it wasn’t just good enough to be good, it had to be great. Friday’s rally happened on remarkably light volume ahead of a long weekend at the end of the month, so the usual end-of-calendar-month price surge didn’t meet any resistance.
“This week is different, we had a bad day. There’s concern about what the jobs numbers might show, about seasonality. That’s why the volatility index went up. I don’t think the ISM numbers, which showed weak manufacturing and rising prices, were helpful at all. That’s what happened. Gravity.”
Dennis Dick, Trader at Triple D Trading Company:
“If you look at the action on Friday, everything was up, but Nvidia was lagging. So you can see that the relative strength was weak after their earnings release. And things haven’t been good since then.”
“September is a very weak month of the year, so I think people are nervous. People are using this as an excuse to take profits, and the most likely candidates to take profits are the companies competing in the semi-finals, because they were the strongest.”
Stephen Masuka, Senior Vice President, Wedbush Securities, San Francisco:
“We’ve hit a new high again. There was absolutely no news over the weekend that mattered to anyone. But now we’re down 600 points.”
“It’s expensive. It’s not a cheap stock. I mean, gosh, I don’t know what Nvidia had to do in the quarter… It was a very good quarter, with a few minor issues, but that shows you that these things are very expensive.
“It’s also kind of a self-fulfilling prophecy because there’s a lot of money flowing into ETFs and a lot of money flowing into S&P 500s and target-rate funds and all that. They’re spreading out in the market and they’re spreading out in the market on a market-cap-weighted basis, so it’s kind of a self-fulfilling prophecy. If you’re one of the biggest names by market cap in the S&P 500 and all the money is flowing into S&P 500 ETFs, how can that not help you? And I think that’s part of it, and that’s part of why you’re getting these overvalued valuations.”
Brian Jacobsen, Chief Economist, Associated Wealth Management, Brookfield, Wisconsin
“People are worried and thinking about all sorts of macroeconomic issues. Did the Fed get it wrong? The fear is that it is floundering on the timing and pace of rate cuts rather than sticking to the decision. Does the jobs report increase the odds of a recession? The big one here is that investors are likely to sell what has risen further in the face of any pullback.”
Scott Rein, Chief Global Market Strategist at Wells Fargo Investment Institute
“We entered with the futures lower but once the ISM number came out, it led to this decline.”
“The market is worried about how severe the slowdown is going to be. Even with the pullback we saw today, the tech sector is still up a lot on the year, and these things have moved a lot. These stocks have been leading the chart up and on days when they’re down they’re going to be leading the chart down. When you look at something like 2/10 reversals, the last eight recession curves have been positive before the recession happened and we’re just a few basis points away. The market is thinking about that as well.”
Michael Green, Portfolio Manager, SIMPLIFY, San Francisco Bay Area
“People are overly concerned with Nvidia and a lot of these names and they’re trying to reduce that concern. And they have the potential to sell these things in a big way.”
“I also think there’s been a reduction in election risk as election season officially starts now that people are coming back from Labor Day and everyone is off the beach. Everyone looked at their wallets and said that with the political uncertainty surrounding a close election, we want to be less risky. The PMI report was a pretext for that.”
Kali Cox, Chief Market Strategist, Ritholtz Wealth Management, New York
“Stocks started the decline on a sour note, but it’s hard to pinpoint exactly why people are selling today. Technology is dragging the index lower, with Nvidia accounting for about a third of the S&P 500’s losses. We saw a manufacturing report out this morning that suggested demand for goods was slowing. But it wasn’t shockingly bad data, and the narrative of slowing demand isn’t entirely surprising.
“I think some of the decline is due to seasonality. September is typically a tough month for the stock market — the S&P 500 has fallen on the Tuesday after Labor Day every year since 2016. Maybe people are simply trying to make up for lost time during the hot summer days.
“Believe in this bull market, but protect yourself from rash decisions in what could be a turbulent downturn. Don’t be distracted by short-term market fluctuations. Since 1950, 60% of market sell-offs have not reached correction territory, and 26% have ended before the dreaded bear market level.” (This story has been reprinted to remove unnecessary text)