The market took a hit on Thursday, with the Dow dropping nearly 400 points and the Nasdaq tumbling almost 2%. The usual suspects—Nvidia, Microsoft, even Palantir—dragged down the indexes. It's tempting to blame "market volatility," but the data suggests a more specific problem: the AI trade is looking shaky.
AI stocks have been all over the place this month. After AMD's supposed strong showing on Wednesday, the stock tanked 7% the next day. Oracle, another darling, dropped 2%. These aren't minor corrections; this is the kind of volatility you see when investors start questioning the fundamentals. As Mike Mussio from FBB Capital Partners put it, these valuations were "priced for perfection." And perfection, as any analyst knows, is a dangerous assumption.
The problem isn't just earnings beats versus tepid guidance, though that's certainly part of it. (The market hates uncertainty, especially when it comes to future profits.) It's the underlying assumption that AI is a guaranteed, never-ending growth engine. The numbers just don't support that level of optimism.
But here's where it gets interesting. The market sell-off coincided with some genuinely worrying layoff data. Challenger, Gray & Christmas reported over 153,000 job cuts in October, a 175% jump from last year. That's the highest level in 22 years, and the worst year for layoffs since 2009. Now, correlation isn't causation, but the timing is hard to ignore. Are these layoffs a sign that the AI boom is creating as much disruption as it is opportunity?
Revlio Labs, a workforce intelligence firm, estimated the U.S. lost 9,100 nonfarm jobs in October.
The official government data is MIA due to the ongoing shutdown (a mess in its own right). That means we're relying on private firms like Revlio Labs and Challenger, Gray & Christmas to get a read on the economy. And what they're telling us isn't pretty. The stock market bears are using this to argue the labor market is cooling.
And this is the part of the report that I find genuinely puzzling. We're seeing massive investment in AI, but also massive layoffs. Where are these people going? Are they being retrained for AI-related jobs? Or are they simply being displaced? The data on that is scarce, which is a problem in itself.
Daniel Skelly, head of Morgan Stanley's wealth management market research and strategy team, notes that fewer than 45% of S&P 500 stocks are trading above their 50-day moving averages. He says the recent pullback in AI stocks has highlighted “the narrow nature of the market rally.” It's a valid point. The market's been propped up by a handful of tech giants, and if those giants stumble, the whole thing could come crashing down.
The bond market seems to agree. Traders are dumping tech stocks and buying bonds, driving down yields on Treasury notes. That's a classic flight to safety, and it suggests that investors are bracing for more turbulence.
So, is this the start of a full-blown AI bubble bursting? Not necessarily. As Mussio points out, a strong holiday season could still trigger a year-end rally. But the data paints a clear picture: the AI trade is far riskier than many investors realize. The valuations are stretched, the labor market is shaky, and the economy is facing significant headwinds. It's time for a reality check.
The market's infatuation with AI looks less like a revolution and more like a speculative frenzy. Time to re-evaluate those portfolios.
