Key takeaways The S&P 500 declined 1.17% and the Nasdaq dropped 2.04% on Tuesday as AI-linked stocks tumbled. Palantir fell 8% despite beating earnings estimates as investors questioned valuations exc...
U.S. stock markets suffered their steepest decline in a month on Tuesday as mounting concerns about inflated valuations of artificial intelligence companies triggered a broad selloff, with warnings from Wall Street executives amplifying fears that the technology sector's remarkable rally may be reaching unsustainable levels.
The S&P 500 declined 1.17% to close at 6,771.55, while the Nasdaq Composite, heavily weighted toward technology stocks, fell 2.04% to finish at 23,348.64.
The Dow Jones Industrial Average lost 251.44 points, or 0.53%, to 47,085.24. The selloff extended into Asian trading on Wednesday, with Japan's SoftBank Group closing 10% lower and losing approximately $23 billion in market capitalization.
Palantir Technologies became a focal point of valuation concerns after its shares plummeted 8% on Tuesday, even after the data analytics company exceeded Wall Street's third-quarter estimates and raised its full-year revenue guidance to $4.4 billion.
The stock, which had surged more than 150% this year, trades at more than 200 times forward earnings.
Before Friday's close, the company was priced at 85 times sales expected over the next 12 months, making it by far the most expensive stock in the S&P 500 Index.
The company reported quarterly earnings of 21 cents per share on revenue of $1.18 billion, both exceeding analyst expectations.
However, the extreme valuation multiples overshadowed the positive results, with investors questioning whether the company can maintain the growth trajectory necessary to justify its market price.
Adding weight to investor concerns, chief executives of two major Wall Street banks issued stark warnings about the sustainability of current market valuations.
Speaking at the Global Financial Leaders' Investment Summit in Hong Kong on Tuesday, Goldman Sachs CEO David Solomon stated that a market pullback appears likely in the near future.
"It's likely there'll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months," Solomon told the summit. He emphasized that such corrections are normal features of long-term bull markets, advising investors to remain invested and review their portfolio allocations rather than attempting to time the market. "A 10 to 15% drawdown happens often, even through positive market cycles," he added. "It's not something that changes your fundamental, your structural belief as to how you want to allocate capital."
Morgan Stanley CEO Ted Pick echoed similar sentiments at the same event, characterizing periodic pullbacks as healthy market developments.
"We should also welcome the possibility that there would be drawdowns, 10 to 15% drawdowns that are not driven by some sort of macro cliff effect," Pick stated.
The current S&P 500 valuation of 23 times forward earnings significantly exceeds its five-year average of 20 times, indicating what analysts describe as a market priced for perfection.
Market veteran Louis Navellier warned in a note that fear of an AI correction is building. "There is fear of an AI correction, and if it comes, it will sweep the rest of the market with it due to the heavyweight of the leading names," he wrote.
Further intensifying skepticism around AI valuations, Michael Burry's Scion Asset Management disclosed bearish positions against Nvidia and Palantir in regulatory filings released Monday.
Burry, who gained fame for correctly predicting the 2008 housing market collapse, purchased put options with a notional value of approximately $187 million against Nvidia and $912 million against Palantir as of September 30.
Palantir CEO Alex Karp responded sharply to Burry's disclosed positions during an interview with CNBC's "Squawk Box" on Tuesday. "The two companies he's shorting are the ones making all the money, which is super weird," Karp stated. "The idea that chips and ontology are what you want to short is bats--- crazy."
Karp added that he believes the positions represent market manipulation and predicted he would be vindicated. "I do think this behavior is egregious, and I'm going to be dancing around when it's proven wrong," he said. When contacted by CNBC for comment on Karp's remarks, Burry declined to respond.
The concentration of market gains in a handful of technology giants has heightened systemic risk. The so-called "Magnificent Seven" tech stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—have driven a disproportionate share of market returns, making the overall market highly vulnerable to sector-specific downturns.
Some analysts are drawing comparisons to the dot-com bubble of the late 1990s, noting that share prices for many AI companies have soared far ahead of credible profit expectations.
The AI-led rally has pushed valuations to levels that increasingly resemble the excesses of that era.
The selloff comes as Big Tech companies plan massive capital expenditures on AI infrastructure, with an estimated $400 billion allocated for 2025 alone.
While these investments reflect confidence in AI's transformative potential, they also raise questions about when returns will materialize and whether current valuations adequately account for execution risks.
Despite the growing concerns, some investors remain optimistic about AI's long-term prospects.
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