As the selloff in tech stocks intensified market concerns that the AI-driven rally may have run too far, Asian stocks are expected to follow Wall Street's sharp decline from last Friday on Monday.
Futures for Japanese and South Korean stock indices both pointed lower, while Australian stock index futures were roughly flat.
Earlier, disappointing earnings from US tech giants triggered the worst selloff on Wall Street since June. Last Friday, the S&P 500 fell 1.8% and broke below its 100-day moving average; the Nasdaq 100 plunged 3.5% and briefly entered a technical correction; the Philadelphia Semiconductor Index tumbled 7.2%; and Intel (INTC.US) shares posted their biggest drop in more than 40 years.
Last Friday, Brent crude oil prices rose as traders weighed the risk of possible renewed US military action against Iran and the prospect of supply disruptions in the Middle East. Over the weekend, several oil tankers were attacked in the Strait of Hormuz. Meanwhile, gold fell 3.7% last Friday, closing at its lowest level in more than a year. The US dollar was largely stable in early trading on Monday.
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As AI spending surges, investors are showing increasingly less tolerance for tech companies whose core businesses are slowing. Earnings released last week by Alphabet (GOOGL.US) and Amazon (AMZN.US) exacerbated concerns that AI may be eroding the core businesses that fund these investments.
Traders are preparing for greater volatility, with US midterm elections this week and Nvidia (NVDA.US) set to report earnings later in November.
This year, US tech giants are expected to collectively spend $750 billion on AI, while the advertising, consumer, and retail businesses supporting this massive expenditure have already begun showing signs of slowing, raising questions about how long the investment boom can continue at its current pace.
Matt Maley, Chief Market Strategist at Miller Tabak, said: "The core businesses of these hyperscalers are slowing, which means the massive returns everyone has been saying will eventually arrive are being pushed further out."
Last Friday's selloff intensified concerns about the sustainability of the AI-driven rally after disappointing earnings from tech giants, delivering the long-awaited volatility shock to the market. The Cboe Volatility Index touched its highest level intraday since April; demand for put options to guard against further declines rose sharply, while correlations between stocks also increased — all signs of mounting market stress.
However, these indicators remain well below levels reached in March this year after the US and Israel attacked Iran.
The pullback has also prompted some investors to start looking for buying opportunities. Mike Wilson of Morgan Stanley said he expects several "clearing events" ahead that could temporarily push stocks lower and create opportunities for investors to increase risk exposure.
Florian Ielpo, Head of Macro Research at Lombard Odier Investment Management, said: "This looks more like a bullish rotation centered on valuation de-rating rather than the beginning of broad market deterioration."
In other markets, crypto assets recorded $3.6 billion in net outflows after Binance resumed customer withdrawals last Sunday. The world's largest cryptocurrency exchange said the pace of fund withdrawals had slowed after an initial surge. Binance froze withdrawals last Thursday following a $6.3 billion hack while it investigated and stabilized the platform, and pledged full compensation to customers.
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