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- Global stocks sold off after breaking record highs amid fears of overstretched valuations and slower earnings growth.
- Bank of America clients were some of the main contributors, selling billions in holdings amid reduced buybacks and rising volatility.
- Michael Burry and top bank CEOs, including David Solomon and Jamie Dimon, warned that AI valuations look unsustainable, hinting at a possible market correction.
Global markets were hit with a new wave of sell-offs as investor sentiment around AI showed valuation fears. The sudden decline from record highs saw heavy losses across global markets, with tech stocks being hit the most.
Concerns over stretched valuations, cautious corporate statements, and growing volatility hinted that investors might finally be questioning whether the year’s AI-driven surge has gone too far.
Retreat from Record Highs
Global stocks pulled back from record highs as investors feared that markets had stretched too far, with CEOs from big Wall Street banks questioning whether tech valuations are too high and could actually last.
Asian stocks declined the most during the Asian session on Wednesday, with Japan’s Nikkei dropping nearly 7% from Tuesday’s record high. EU stocks declined earlier in the session, then regained ground throughout the day.
US stocks rebounded on Wednesday due to better-than-expected data, with the ADP employment change coming in at 42k, higher than expected. This provided some hope that the labor market isn’t at risk, despite being the only data showing employment figures. ⁽¹⁾
Last month, JPMorgan Chase CEO Jamie Dimon warned of a big US stock correction in the next six months to two years. A surge in AI hype has driven markets this year. It draws comparisons to the dotcom bubble. ⁽²⁾
AI Mania & Valuation Fears
The rapid rise in AI stocks has driven growth throughout global markets, with companies such as the Magnificent 7 group (Nvidia, Apple, Microsoft, Alphabet, Tesla, Meta, and Amazon) having seen their valuations skyrocket.
Despite a slowdown in earnings growth, analysts point out that investors have poured billions into AI stocks, which now account for about half of the S&P 500’s market capitalization. Tech valuations are rising to levels not seen since the dot-com bubble, according to the Bank of England. ⁽³⁾
Traders and policymakers remained concerned due to hyperinflated valuations. Given how concentrated the rally has grown, a single setback from regulation or weak earnings might cause a dramatic drop.
Heavy Selling by Investors
Bank of America reported that its clients were near-record net sellers of US stocks, as institutional investors caused their second-largest outflows in the bank’s history, causing stock sales of $10.9 billion. ⁽⁴⁾
Institutions drove the selloff after buying the week before. Their outflows were the biggest since September 2015. Corporate buybacks fell to their lowest level since April 2024, where they usually rise during earnings season. ⁽⁵⁾
Selling pressure was focused on large-cap stocks. Tech and financial stocks saw record outflows, the worst since July 2023 and March 2022. ⁽⁶⁾
Michael Burry’s Bet Against AI Stocks
Michael Burry, the famous Big Short investor who bet against the housing market in 2008, has taken a bearish stance on tech giants, worried that AI valuations are too high.
His hedge fund, Scion Asset Management, bought over $1 billion in put options (a type of option that gives the right to sell a stock at a specified price) on Nvidia and Palantir. ⁽⁷⁾
Burry posted his warnings on X: “Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play.”
Burry’s bearish outlook lines up with recent comments made by Goldman Sachs CEO David Solomon and Morgan Stanley CEO Ted Pick, that investors should brace for impact as a correction on highly inflated valuations over the coming months.
Looking Ahead
The global selloff shows how fast sentiment has turned fragile after months of AI-fueled growth.
Stretched valuations, as some analysts see it, have made markets potentially susceptible to corrections, despite solid data and robust earnings.
The latest swing serves as a reminder to traders that even the biggest rallies can falter whenever confidence shifts.
