AI Leads Stock Selloff Sparked by Valuation Angst: Markets Wrap

(Bloomberg) — The global stock rally hit a speed bump as earnings from artificial-intelligence bellwether Palantir Technologies Inc. failed to impress and Wall Street executives warned of rich valuations.

After a stretch of narrow, tech-led gains that lifted the S&P 500, futures on the benchmark fell 0.9% as the “Magnificent Seven” megacaps lost steam. Tesla Inc. and Nvidia Corp. led declines among the group in premarket trading, with Nasdaq 100 contracts down 1.2%. Palantir slid more than 7%.

Meanwhile, the dollar rose to its highest since May as Federal Reserve officials offered mixed signals on the path of interest rates. Treasuries rebounded, with the 10-year yield falling two basis points to 4.09%. Gold fell for a third straight day, while Bitcoin was headed for its lowest level since June.

Morgan Stanley’s Ted Pick and Goldman Sachs Group Inc.’s David Solomon were among Wall Street chiefs at a summit in Hong Kong saying that markets could be due for a pullback of more than 10% in the next 12 to 24 months.

While they noted a correction may be a healthy development, their caution comes as investors grow uneasy with stock prices after the S&P 500 surged more than 35% from April lows, fueled by a frenzied rally in tech megacaps tied to the AI boom.

Corporate earnings are strong but “what’s challenging are valuations,” said Mike Gitlin, president and chief executive officer of investment manager Capital Group, during the Hong Kong Monetary Authority financial summit.

Palantir came up short even after the company raised its revenue outlook and beat estimates for third-quarter sales. The stock has surged more than 150% this year, closing Monday at a record $207.18. Its price-to-sales ratio stood at 85 as of Friday — the highest in the S&P 500. Adding to the unease, hedge fund manager Michael Burry disclosed bearish wagers on Palantir and Nvidia.

“On Palantir, there’s been quite a lot of ‘sell-on-the-news,’ particularly for stocks which had outperformed prior to their earnings,” said Karen Georges, a fund manager at Ecofi Investissements in Paris. “When you have lofty valuations, it’s really not surprising to see harsh market price action.”

UK bonds outperformed their European peers after Chancellor of the Exchequer Rachel Reeves signaled that further tax increases may be needed to achieve fiscal consolidation in this month’s budget, while stressing the importance of curbing inflation and keeping borrowing in check.

The 10-year gilt yield fell two basis points to 4.41%, while the pound weakened as traders priced in a quicker pace of interest-rate cuts.

Meanwhile, European shares dropped 0.8%. The risk-off mood weighed on commodities as well, with copper falling more than 2% and brent crude trading near $64 a barrel.

Also adding to the negative sentiment Tuesday was increased uncertainty over the Fed’s policy outlook.

Officials presented mixed messages Monday, reflecting divisions within the central bank ahead of its December meeting. Austan Goolsbee emphasized persistent inflation risks, while Lisa Cook pointed to growing labor-market fragility. Mary Daly said policymakers should “keep an open mind” about another rate cut, and Stephen Miran noted that policy remains restrictive.

What Bloomberg strategists say…

“Executives are cautioning about an equity market drop of more than 10% in the next 12 to 24 months. That’s hardly a warning, it’s simply a description of normal market behavior. Over the past 55 years, the S&P 500’s average annual peak-to-trough decline has been about 15%, while the average annual return is 9%.”

—Skylar Montgomery Koning, Macro Strategist. Click here for the full analysis.

Despite Tuesday’s losses, positioning on the S&P 500 remains bullish and extended, but with profit-taking risks less evident, according to Citigroup Inc. strategists.

“We have the stock market trading at an all-time high, whether you look at the US or Europe,” Benedicte Lowe, equity derivatives strategist at BNP Paribas SA, told Bloomberg TV. “Any investor is looking for any signs of downward news. Our view remains bullish until the year-end.”

Corporate Highlights:

Archer-Daniels-Midland Co. shares sank 9.7% in premarket trading after the grain handler cut its adjusted earnings per share guidance for the full year. Pfizer Inc. raised its 2025 profit forecast for the second time this year, as ongoing cost cuts helped make up for slow sales growth that’s driving its battle for the obesity start up Metsera Inc. Uber Technologies Inc. posted its strongest quarterly growth since late 2023 as customers ordered more rides and deliveries than expected, a sign the company’s efforts to offer a wider range of services in more geographies are bearing fruit. BP Plc’s profit exceeded expectations with operational improvements and higher oil and gas production outweighing lower prices, as the company’s turnaround plan builds momentum. Ferrari NV reported robust third-quarter earnings as higher prices and demand for customized cars helped the luxury carmaker defy concerns around US tariffs and weaker China sales. Saudi Aramco reported profit that beat analysts’ estimates as a boost in production outweighed the impact of weaker oil prices. Adani Enterprises Ltd., led by billionaire Gautam Adani, reported an 84% jump in quarterly profit on one-time gains due to sale of its unit and restructuring in another. It also approved a $2.8 billion rights issue. Some of the main moves in markets:

Stocks

S&P 500 futures fell 0.9% as of 7:32 a.m. New York time Nasdaq 100 futures fell 1.2% Futures on the Dow Jones Industrial Average fell 0.6% The Stoxx Europe 600 fell 0.9% The MSCI World Index fell 0.2% Currencies

The Bloomberg Dollar Spot Index rose 0.3% The euro fell 0.3% to $1.1482 The British pound fell 0.6% to $1.3059 The Japanese yen rose 0.4% to 153.56 per dollar Cryptocurrencies

Bitcoin fell 2.7% to $103,989.76 Ether fell 2.7% to $3,505.19 Bonds

The yield on 10-year Treasuries declined two basis points to 4.09% Germany’s 10-year yield declined two basis points to 2.65% Britain’s 10-year yield declined three basis points to 4.41% Commodities

West Texas Intermediate crude fell 1.4% to $60.18 a barrel Spot gold fell 0.3% to $3,987.88 an ounce This story was produced with the assistance of Bloomberg Automation.

–With assistance from Neil Campling, Eleanor Thornber, Subrat Patnaik and Julien Ponthus.

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