A trader works on the floor of the New York Stock Exchange.
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Stocks fell on Tuesday, weighed down by declines in artificial intelligence companies such as Palantiras investors become increasingly concerned about the valuations of leading stocks in the bull market.
S&P 500 Index fell 1.17% to close at 6,771.55, while Nasdaq Composite traded down 2.04% to close at 23,348.64. Dow Jones Industrial Average lost 251.44 points, or 0.53%.
Palantir shares fell 8% even after the software company beat Wall Street's third-quarter forecasts and made clear recommendations, fueled by the growth of the AI business. The stock, which is up more than 150% this year, trades at more than 200 times forward earnings. This means investors in the name and other AI stocks expect the companies to continue to significantly raise their earnings and revenue forecasts to justify investors continuing to buy the stock.
OracleShares of the company, with a forward P/E of 35, fell 4%, giving up nearly 50% of their gains this year. Chip manufacturer AMDwhich has more than doubled this year, lost almost 4%. Other AI stocks such as Nvidia And Amazon also moved away.
The rally in AI shares has pushed the S&P 500's forward price-to-earnings ratio above 23, near its highest level since 2000, according to FactSet. As these stocks have lifted the broader market to new heights in recent months, Ameriprise's Anthony Saglimbene told CNBC that without a pullback, their valuations are starting to get “really stretched.”
“We haven't seen any major corrections or any real pressure on stocks since April,” the company's chief market strategist said. “Earnings are good, but I think investors are starting to wonder based on the pace [capital expenditure] investments from some of these key big tech companies: “Will you see earnings growth next year to justify the level of capex?”
Executive comments Goldman Sachs and Morgan Stanley deepened the loss of confidence among investors on Tuesday. In the evening, Goldman's David Solomon said that “equity markets are likely to see a drawdown of 10% to 20% over the next 12 to 24 months.” Additionally, Morgan Stanley CEO Ted Peake said, “We should also welcome the possibility that there will be drawdowns of 10 to 15% that are not driven by some macrocliff effect.”
“Fundamentals are still good, but I fully expect that in some periods you will see periods of pullback,” Salmbene said. “Whether this will lead to a 5%, 10% or 15% correction by the end of the year remains to be seen.”
Wall Street ended the session mixed, with the S&P 500 and Nasdaq ending Monday higher and the Dow Jones Industrial Average falling more than 200 points. More than 300 stocks in the broad market index closed in the red in the previous session, adding to concerns about weak latitude and a high level of concentration in technology companies — especially after the number of S&P 500 stocks that rose last month was smaller than the number that declined.
“The market has been pretty tight for the last few months,” Saglimbene said. “If there is a slowdown or short-term decline in artificial intelligence or technology, then in fact [aren't] other areas that have also performed well, and if we don't have a lot of hard data on the economy and the rest of the S&P 500 isn't as profitable, where do you go?”
