Wall Street Hit by Tech Rout as AI Winners Tumble: Markets Wrap

(Bloomberg) — Volatility lashed Wall Street, pushing high-valuation technology shares and crypto lower while bonds pared losses after a senior Federal Reserve official signaled room for rate cuts.

A tech rout hit stocks amid growing skepticism about the artificial-intelligence trade. Nvidia Corp. led declines in megacaps. Losses accelerated as the S&P 500 breached a key technical level, with the index down 1%. The Nasdaq 100 slid 1.5%. Micron Technology Inc. will report results after the close.

For years, investing in big techs has been a no brainer, given their stalwart balance sheets. Now, there’s concern over whether the sector — which has soared during the bull market — can keep justifying its lofty valuations and ambitious AI spending.

“AI remains the market’s defining investment theme, but signs of fatigue are emerging,” said Jack Ablin at Cresset Capital Management. “Sector valuations are elevated, infrastructure spending is unprecedented, and enthusiasm mirrors past speculative cycles.”

While this boom rests on a far stronger foundation than the dot-com era, Ablin notes that hyperscalers are deploying more than $400 billion annually into AI infrastructure, but enterprise monetization lags sharply. That’s an imbalance that could drive volatility in the year ahead, he said.

“Investors are beginning to rotate toward sectors with clearer earnings visibility as AI margins peak and capital intensity rises,” he noted. “The next 12-18 months will determine whether this cycle matures into a sustainable growth engine or contracts under its own scale.”

The S&P 500 fell to around 6,730, breaching the average price of the past 50 days. Its equal-weighted version – which gives Dollar Tree Inc. as much clout as Apple Inc. – edged only mildly lower.

Bonds bounced from session lows as Fed Governor Christopher Waller signaled support for further rate cuts. While investors saw his comments as more dovish, the official also warned there’s no need to rush amid elevated inflation. The yield on 10-year Treasuries advanced one basis point to 4.15%.

The dollar rose 0.2%. Oil climbed as geopolitical risks mount from Russia to Venezuela.

At Miller Tabak, Matt Maley notes that this is the last full week of trading for the year, so we could see some “fireworks” over the next few days.

“As much as investors want to focus on other groups, the tech sector is still going to determine what happens over the next two weeks,” he said.

As the year draws to a close, a clearer narrative has emerged in recent weeks: the mega-cap technology stocks that have powered this bull run may be losing their ability to carry the market on their own, according to Fawad Razaqzada at Forex.com.

“Confidence in the sector is being challenged, particularly over whether stretched valuations and heavy spending on artificial intelligence can still be justified,” he said.

If we see renewed strength in tech names, Razaqzada noted, then this could be the catalyst to drive markets to new highs.

“You want sectors that have been leading all year to at least hold up while other sectors play catch up,” he concluded.

The recovery from the November lows in the tech-heavy Nasdaq 100 has begun to lose momentum as disappointing figures from Broadcom Inc. and Oracle Corp. last week dampened AI enthusiasm, noted Adam Turnquist at LPL Financial.

“Additionally, rotation pressure out of tech has accelerated, with positioning data showing rising demand for smaller-cap and value stocks,” he said.

The stock market is in a classic rotation period, not a correction, and the long overdue rotation, where investors are moving money out of overvalued tech stocks, is in its early innings, according to David Bahnsen at The Bahnsen Group.

“While grotesque valuations in big tech stocks can get even more grotesque and the party can continue for some time, we believe the safer route is to lean into this current rotation by increasing exposure to the energy, consumer staples and health care sectors,” he said.

To Bahnsen, momentum can carry things a long way past fundamentals, as history has made clear.

“It does appear there is now real market fatigue in this singular AI infrastructure story, and the circularity issue in revenue, the rationalization of capex, and the fact that not all players can win at once, is seemingly becoming more accepted by markets,” he concluded.

Doubts about the viability of the practicality of the aggressive buildout plans for massive AI data centers continue, said Louis Navellier at Navellier & Associates.

“These fears of delays cloud the existing uncertainty of the timing of the profitable return on the massive AI investment on the table,” he said. Still, “revenue and earnings are forecasted to accelerate in 2026 due to higher guidance, especially from the data center companies that have a growing order backlog.”

“We believe the AI story remains intact and expect a more widespread capture of AI value creation to support a broadening of leadership in equity markets,” said Mark Haefele at UBS Global Wealth Management. “We recommend diversification beyond the enabling layer and into the application layer, and suggest limiting exposure to companies trading at elevated price-to-earnings multiples.”

“We don’t think the AI rally is dead yet, and expect it to last through 2026,” said John Higgins at Capital Economics. “That view underpins our forecasts for strong gains in those equity markets most exposed to it, particularly the US and some of those in Asia.”

Higgins also noted that other equity markets, and “risky” assets more broadly, might have less to gain, though. And he doesn’t think the good times for tech will last forever, and suspects valuations will eventually become sufficiently stretched that a correction is likely.

His base case, though, is that that won’t happen until 2027.

“The keys are earnings and interest rates,” said Nicholas Bohnsack at Strategas. “Profits are largely behaving. Suspicion is warranted over the vendor-financed alchemy aiding M7 hyperscalers and adjacent AI ecosystem distributaries. Thus, the continued improvement in the non-tech revenue stack is important.”

The message from sell-side analysts is that there’s still fuel in the tank for Corporate America.

Their aggregated bottom-up price targets suggest the pace of income growth in the S&P 500 will accelerate each year through 2027, data compiled by Jefferies show. That would translate into three consecutive years of double-digit earnings expansion.

All Wall Street strategists surveyed by Bloomberg expect the S&P 500 to go higher by the end of 2026. At 7,555, their average projection points to a 12% gain from current levels. A fourth year of double-digit returns would extend this bull run to a streak seen only three times in the past century.

“While US stocks are likely to experience bouts of volatility next year as markets digest evolving profit dynamics, we expect big tech’s secular drivers to remain a source of strength for major benchmarks,” said Anthony Saglimbene at Ameriprise.

US PREVIEW: Double CPI to Flag Peak for Tariff Pass-Through

Traders also geared up for Thursday’s inflation reading amid a dose of skepticism as the consumer price index runs the risk of being less reliable than usual due to government-shutdown disruptions.

The November CPI report will offer only a partial snapshot of inflation, without monthly changes for most of the price categories. Much of the October price information was unable to be collected and November data gathering was also delayed by the government closure.

That explains the relative sense of apathy regarding the data, with options traders betting the S&P 500 will swing 0.7% in either direction, according to data compiled by Barclays Plc. That’s sharply lower than the 1% average realized move spurred by the 12 reports delivered through September.

A survey conducted by 22V Research showed that 36% of investors believe that the market reaction to CPI will be “risk-on,” 46% said “mixed/negligible” and only 18% “risk-off.”

Earlier this week, the high-profile jobs report also drew limited reaction. The data was impacted by the federal shutdown and proved to be a noisy reading showing the labor-market is slowing, but not collapsing.

“The muted response to the employment data is likely to be repeated – after all, the data quality concerns with payrolls are also applicable to CPI,” said Ian Lyngen at BMO Capital Markets. “At least insofar as there will be a reasonable amount of skepticism regardless of how the data ultimately comes in.”

Outlining a scenario where inflation continues to slow through 2026, Waller said in a CNBC forum that monetary policy settings are up to 100 basis points above neutral — the level where the Fed is neither restraining growth nor stoking price pressures.

Waller, who is under consideration to be the next Fed chair, is expected to meet for an interview with President Donald Trump later Wednesday.

Waller’s shot for the Fed chair job improved this week, alongside that of Kevin Warsh, as doubts emerged over frontrunner Kevin Hassett, according to Elias Haddad at Brown Brothers Harriman & Co.

“From a market perspective, Waller is the top pick, as he is a known quantity inside and outside the Fed, he has credibility and knows how to build consensus,” said Chris Low at FHN Financial.

The Fed lowered rates for a third straight meeting last week to support what Chair Jerome Powell called a “gradually cooling” labor market with “significant” risks of a further slowdown.

However, Fed officials are split over whether more cuts are needed next year. The median Fed official penciled in just one reduction in 2026, according to rate projections released alongside the decision, but some policymakers see no further cuts. Traders, meanwhile, have been counting on two.

Corporate Highlights:

Amazon.com Inc. is reorganizing teams working on artificial intelligence projects, putting a top leader from the company’s cloud division in charge of a new unit. OpenAI is in initial discussions to raise at least $10 billion from Amazon.com Inc. and use its chips, a potential win for the online retailer’s effort to broaden its AI industry presence and compete with Nvidia Corp. Alphabet Inc.’s Google is rolling out a more efficient and affordable version of its most powerful artificial intelligence model across its products, building on the company’s momentum after the successful launch of Gemini 3. Oracle Corp. said final negotiations on an equity deal for a data center project in Michigan are “on schedule” and doesn’t include Blue Owl Capital, a firm that has helped finance massive data center projects for firms including Oracle and Meta Platforms Inc. in recent months. Warner Bros. Discovery Inc., the parent of HBO and CNN, advised its shareholders to reject a hostile takeover bid by Paramount Skydance Corp. in favor of its original agreement with streaming giant Netflix Inc., deeming the Paramount offer “inferior” and “inadequate.” Ford Motor Co. canceled a 9.6 trillion won ($6.5 billion) battery agreement with LG Energy Solution Ltd. after the US automaker rolled back its electric vehicle ambitions. General Mills Inc.’s sales in the latest quarter exceeded Wall Street expectations as a strategy to improve packaging and marketing while also lowering some prices paid off. The chief executive of General Mills said more North American consumers are buying food when it goes on sale, the latest signal that households are feeling pinched by the economy. Builder Lennar Corp.’s forecast for quarterly home orders missed analysts’ estimates as affordability pressures and the weakening job market pushes buyers to the sidelines. SpaceX has told its employees the company is entering a regulatory quiet period, people familiar with the matter said, taking the rocket and satellite maker a step closer to an initial public offering slated for 2026. Air taxi maker Joby Aviation Inc. said it plans to double its US manufacturing capacity to as many as four aircraft per month by 2027, using both its main production site in California and another in Ohio. Bankrupt Spirit Aviation Holdings Inc. is in revived discussions to merge with Frontier Group Holdings, people familiar with the matter said, in a deal that could rescue the deep-discount airline from insolvency at a time of stiff competition from larger US carriers. US prosecutors charged the founder of bankrupt subprime auto lender Tricolor Holdings with conspiring to defraud lenders and investors, in a sweeping indictment of the leadership of a used car dealer and financing company that collapsed in a wave of scandal in September. The White House is set to announce drug pricing deals with pharmaceutical heavyweights Novartis AG and Roche Holding AG as soon as Friday, according to people familiar with the situation, further easing trade tensions with Switzerland after a standoff over tariffs. The European Union Aviation Safety Agency is proposing inspections of some Airbus SE A320 jets and requiring carriers to repair any out-of-spec panels found on the fuselages. BBVA SA is weighing a series of large share buybacks as it seeks to return capital to investors following its failed bid for Banco Sabadell SA. Julius Baer Group Ltd. is telling some clients with lower balances at the bank to increase the amount of funds they invest with the wealth manager or go elsewhere, according to people familiar with the matter. Continental AG appointed Christian Kötz to lead the German tire maker as it prepares to sell its ContiTech industrial unit, the final step in its breakup plan. Mercedes-Benz Group AG unveiled a sweeping management overhaul that includes the departure of longtime design chief Gorden Wagener, underscoring Chief Executive Officer Ola Källenius’ tightening control as the automaker heads into a make-or-break 2026. Raiffeisen Bank International AG will appoint a former finance chief as its next chief executive officer after years of unsuccessful attempts to sell its Russian unit. Diageo Plc agreed to sell its majority stake in East African Breweries Ltd. to Japan’s Asahi Group Holdings Ltd. in a $2.3 billion deal as the struggling UK distiller streamlines operations to speed its turnaround. TotalEnergies SE Chief Executive Officer Patrick Pouyanne said rising demand for oil will help to underpin prices, despite their recent slump on growing concerns about a global surplus. Doncasters Group, an almost 250-year-old UK metal engineering group that supplies Boeing Co., has selected banks for a US initial public offering that could value the firm at more than $4 billion, according to people familiar with the matter. KNDS NV’s board has decided to pursue an initial public offering for the Franco-German tankmaker amid surging demand for defense stocks and potential interest from rival Rheinmetall AG. China Vanke Co., once the nation’s biggest homebuilder, lurched closer toward what would be one of the country’s largest-ever debt restructurings. Tencent Holdings Ltd. has appointed Yao Shunyu as its chief AI scientist, entrusting the former OpenAI researcher with heading up its artificial intelligence efforts. Shares of HashKey Holdings Ltd., operator of Hong Kong’s largest licensed cryptocurrency exchange, fell on their trading debut after an initial public offering that raised HK$1.6 billion ($206 million). MetaX Integrated Circuits Shanghai Co. soared in its first day of trading on Wednesday, the latest outsized debut by a Chinese chipmaker after similar gains by Moore Threads Technology Co. earlier this month. “We’re entering a new stage in the AI frontier — one that’s poised to mint new winners and losers and will likely prove more volatile than the straight line up that we’ve seen so far. That indicates a turbulent 2026 for the stock market.”

—Tatiana Darie, Macro Strategist, Markets Live. For the full analysis, click here.

Some of the main moves in markets:

Stocks

The S&P 500 fell 1% as of 2:34 p.m. New York time The Nasdaq 100 fell 1.6% The Dow Jones Industrial Average fell 0.4% The MSCI World Index fell 0.8% Bloomberg Magnificent 7 Total Return Index fell 1.6% The Russell 2000 Index fell 0.8% S&P 500 Equal Weighted Index fell 0.3% Currencies

The Bloomberg Dollar Spot Index rose 0.2% The euro was little changed at $1.1744 The British pound fell 0.4% to $1.3375 The Japanese yen fell 0.6% to 155.65 per dollar Cryptocurrencies

Bitcoin fell 2.2% to $85,821.7 Ether fell 4.7% to $2,810.98 Bonds

The yield on 10-year Treasuries advanced one basis point to 4.15% Germany’s 10-year yield advanced two basis points to 2.86% Britain’s 10-year yield declined four basis points to 4.47% The yield on 2-year Treasuries was little changed at 3.49% The yield on 30-year Treasuries advanced two basis points to 4.83% Commodities

West Texas Intermediate crude rose 1.3% to $56.01 a barrel Spot gold rose 0.8% to $4,335.65 an ounce –With assistance from Lu Wang.

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