SMAR Daily Industry News

Wall Street loses $5.7T as AI bets unwind

U.S. stock markets have shed $5.7 trillion in market value since the October 6 peak, driven by a sharp reversal in AI-related investments and broader macro pressures. By Thursday, the Nasdaq 100 had lost $2.3 trillion, with 57 % of its components down at least 20 % from their highs – a larger share than when the index entered a bear market in March 2022.

The rout followed an unexpected rally on Wednesday and a brief rebound on Friday as chipmakers recovered on strong jobs data that reinforced expectations of another Federal Reserve rate hike in December. Traders remain focused on inflation, and the Fed’s likely rate increase adds to market uncertainty.

Political factors have compounded the turmoil. A Democratic sweep of Congress raises the prospect of restrictions on the massive data-center buildout that underpins the AI boom, while President Donald Trump, weakened by the midterm election, faces reduced fiscal flexibility and less incentive to support the market.

Portfolio manager Joe Gubler of Causeway Capital Management, which oversees about $76 billion, warned that “there are going to be losers” among those pouring capital into AI capex. Hedge funds have cut gross leverage from its June peak by the most in over a decade, according to Morgan Stanley data, suggesting the liquidation may be nearing exhaustion but could still trigger another low after a brief rebound.

Investors have been rotating toward traditionally defensive sectors such as utilities and consumer staples, yet the Thursday sell-off exposed the limits of that shift as even the new favorites could not withstand the collapse in Big Tech. Societe Generale’s head of quantitative research, Andrew Lapthorne, linked the volatility to crowded AI and oil positions that forced rapid covering and margin-call unwinds.

Some managers avoided the worst of the decline. Jeff Muhlenkamp sold most of his fund’s AI holdings before the rout, leaving a $275 million portfolio that was roughly flat for November and ahead of the S&P 500 for the year. He described the strategy as selling “what was expensive and popular, and bought what was cheap and forgotten.”

Oil price declines, driven by hopes that the Iran conflict will de-escalate, have provided a counterweight by easing inflationary pressures that have affected consumers and businesses throughout Trump’s tariff-heavy presidency. However, any relief is expected to materialize gradually.

Why it matters

The $5.7 trillion equity loss highlights the fragility of AI-driven valuations and the impact of policy shifts on banking-finance portfolios.

FAQ

How much market value has the U.S. equity market lost since early October?
The market has lost $5.7 trillion in total equity market capitalization since the October 6 peak.

What percentage of Nasdaq 100 components fell at least 20 % from their highs?
57 % of Nasdaq 100 constituents had fallen at least 20 % from their highs by Thursday.

Which sectors did investors rotate toward before the recent rout?
Investors rotated toward cheaper, less glamorous sectors such as utilities and consumer staples.

What did Jeff Muhlenkamp’s fund do before the AI sell-off?
He exited almost all AI holdings, leaving a $275 million portfolio that was roughly flat for November and ahead of the S&P 500 for the year.

Source: Economic Times Markets. See the original source for full details.