(Feb 28): US stocks dropped as risk-off sentiment swept through markets and fintech Block Inc’s massive layoffs fanned angst that artificial intelligence (AI) is poised to upend broad sections of the economy.
A larger-than-forecast 0.5% increase in producer prices last month, fueled by services, also weighed on equities by signalling inflationary pressures that may keep the Federal Reserve from cutting interest rates. Nvidia Corp, the heaviest-weighted stock in the S&P 500, extended its post-earnings decline.
The S&P 500 Index was down 0.6% at 11.10am in New York, with four of 11 sectors in the red, led by financials and tech. The Nasdaq 100 Index fell 0.4%. The Dow Jones Industrial Average declined 1.2%, while the KBW Bank Index dropped by as much as 4.7%. Nvidia shares shed 1.8%.
“Markets are a little less confident that the Fed, despite a new chairman, will continue on the rate-cutting path” after the unexpectedly sharp PPI increase, Brad Long, chief investment officer at Wealthspire, said. He also flagged the current “rotational trade,” with software dropping as energy and industrial stocks climb, as investors “are not sure what the through-put of AI means.”
Nvidia’s two-day drop of around 7% came despite surging revenue and a better-than-expected first-quarter outlook, undescoring concerns about the high valuations of stocks that have rallied on the back of the AI boom.
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The “positive earnings surprises weren’t on the scale of what markets got used to in 2023-2024, and arrived amidst growing scepticism about the AI trade in general,” Deutsche Bank strategist Jim Reid wrote in a Friday morning note.
Even as investors fret over whether the AI boom has pushed up some stocks too far, the steady rollout of AI programmes has caused them to pull back from industries that look likely to be upended by the technology.
That risk was fanned on Thursday when Jack Dorsey’s Block said it was cutting 4,000 employees, reducing its workforce by nearly half, in a bet that AI can increase productivity. That comes while the company’s fourth-quarter gross profit of US$2.87 billion rose 24% year-over-year and topped estimates. Block surged 14%.
See also: Retail traders rush to buy the dip in beaten-down software stocks
Meantime, OpenAI will raise US$110 billion in new investment at a US$730 billion pre-money valuation. Investment includes US$30 billion from Nvidia, US$30 billion from SoftBank and US$50 billion from Amazon.com Inc. OpenAI CEO Sam Altman said he doesn’t think his company’s fundraising deals look “circular” as long as revenue keeps growing. Amazon shares slipped 0.09%.
In deal news, Netflix Inc jumped 9.5% after dropping out of the fight to buy Warner Bros Discovery, clearing the way for rival bidder Paramount Skydance Corp to clinch its US$111 billion deal for the studio.
In earnings news, Dell Technologies Inc shares soared 19% after the company’s AI servers sales outlook beat estimates, a sign of robust demand. Autodesk Inc climbed 4.8% after guidance beat estimates. AI datacenter company CoreWeave Inc tumbled 18% after reporting a bigger-than-anticipated loss, signalling heavy spending.
Energy stocks climbed as oil rose with a large deployment of American forces in the Middle East keeping the market on edge.
“The US has not deployed as many military assets to the Middle East since 2003, and to-date Washington has never stood down after such a large buildup,” RBC Capital Markets strategist Helima Croft writes in a note. That poses risk of a “Chekhov’s armada situation, in which the presence of such substantial military assets creates an inexorable momentum to use them.”
Exxon Mobil Corp advanced 1%. Shares of airlines and cruise ship operators were also lower, as any conflict threatens to raise the cost of fuel and snarl consumers’ travel plans.
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