Normally it’s terrible for stock traders when giant tech companies’ shares fall dramatically. Everyone knows that the S&P 500 is dominated by tech stocks—the Magnificent Seven in particular—and their valuations have disproportionate influence over the market as a whole. So the news that Oracle declined 2.66% yesterday and is now down 44% from its high in September, and that CoreWeave was down 8% yesterday and is down a staggering 60% since its all-time high in July should have rocked markets to their core. Both companies are AI “hyperscalers” engaged in the business of building out AI data centers and both—according to traders, at least—have taken on too much debt to fund those facilities. CoreWeave, for instance, offered a $2.25 billion convertible bond last week that will dilute existing shareholders, according to the Wall Street Journal. But for Q3, CoreWeave reported $3.7 billion in current debt, $10.3 billion in non-current debt, and $39.1 billion in future lease agreements for data centers. The company expects to make only $5 billion in revenue this year but says it has $56 billion in “revenue backlog” coming in the future. The collapse in market caps of Oracle and CoreWeave is on the scale of the declines we saw in 2000 or 2008. Surely that’s evidence of the AI bubble bursting? Well, kinda. The S&P 500 stepped back only 0.16% yesterday. Futures are down 0.4% this morning. The index is still up 16% for the year. Markets in Asia and Europe were broadly down this morning—signaling that some kind of selloff is underway. But it doesn’t look as catastrophic as what’s happening to Oracle and CoreWeave.
The reality is that investors are selling off individual stocks of companies that seem to be overextended. But they are broadly bullish on stocks as a whole, and certain tech stocks in particular. Tesla was up 3.56% yesterday, for instance, and Nvidia rose 0.73%.
As traders flee individual tech stocks, they are buying up non-tech sector companies. The “equal-weight” S&P 500 was up marginally yesterday after hitting a record high on Dec. 11. The equal-weight S&P is up 10.2% year-to-date, compared to the regular, market-cap weighted S&P at 16%.
“As the name implies, each index component [of the equal-weight S&P] carries an equal weighting—eliminating the distortion of the mega-cap components and significantly changing sector weightings, including technology, which drops from 33% on the [market cap weighted] S&P 500 to only 13% on the [equal-weight S&P],” according to Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, N.C.
“Concerns over AI momentum have recently weighed on technology and communication services, which posted respective losses of 2.3% and 3.2% last week,” Turnquist wrote in a note seen by Fortune. “Rotational pressure back into more economically cyclical sectors has been a developing theme, with materials, financials, and industrials notably outperforming.”
As the Financial Times put it this morning, “If we’re in a bubble, might it end with a slow hiss, not a loud pop?”
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures were down 0.33% this morning. The last session closed down 0.16%.
- STOXX Europe 600 was down 0.11% in early trading.
- The U.K.’s FTSE 100 was down 0.3% in early trading.
- Japan’s Nikkei 225 was down 1.56%.
- China’s CSI 300 was down 0.63%.
- The South Korea KOSPI was down 2.24%.
- India’s NIFTY 50 was down 0.64%.
- Bitcoin was at $86K.
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