Tech sell-off rattles Wall Street – what it means for markets

What the data reveals about last week’s sell-off

It was not, by any reasonable measure, a good week to own chipmakers, with the Nasdaq falling 2.19% on Friday alone, the Philadelphia semiconductor index notching an eighth straight daily decline and roughly $660bn wiped off the value of US equities in the space of a single session.

The trigger was CoreWeave, or more precisely a growing unease about how much it owes, and that proved enough to prompt a broad rethink of anything with AI anywhere in the pitch deck. The effects travelled well beyond Wall Street, with South Korea’s KOSPI dropping nearly 8% in one session – something its finance ministry put down to the market’s heavy weighting in AI-linked stocks, which is a polite way of saying that everyone owned the same thing – while Indonesia, for reasons entirely its own, managed its steepest one-day fall in 28 years after MSCI warned of a possible downgrade.

None of this has done much damage to the year as a whole, since the S&P 500 is still up 11.89% year-to-date, although October, at a rather less impressive 0.10%, is another matter.

The bull case: why this could be a healthy pullback

Start with the numbers, which are less alarming than the headlines might suggest: the S&P 500 sits only about 2.4% below its 52-week high of 7844.52, and it is still up 1.43% over one month and 1.67% over three. If this is a crash, it’s a remarkably polite one.

The VIX seems to agree, having risen 0.95 points to 16.22, which leaves it some way short of the 20-plus readings that usually accompany genuine fear. Nor have the dip buyers gone anywhere, given that Japan’s Nikkei snapped a six-session losing streak and the KOSPI clawed back 2.05% almost as soon as the dust had settled.

Europe, meanwhile, barely seemed to notice, with the STOXX 600 rising 0.7% on Friday to a three-week high and logging its best week since late June, helped along by solid earnings from companies that have never claimed to be AI plays in the first place. Financials, energy, industrials and defence don’t need a chatbot to make money, and the fact that US 10-year Treasury yields posted their largest weekly decline in more than a year has removed at least one source of pressure for the time being.

Why earnings season could decide the debate

Third-quarter results from Tesla, Meta, Netflix, IBM and GM are in focus this week, with the rest of the megacaps following close behind, and analysts, as is customary at this point in the cycle, are broadly optimistic.

 Good numbers from the biggest names could restore confidence quickly, but the catch is that analysts can’t seem to agree on what good actually looks like, with Tesla EPS estimates ranging from $0.05 to $0.70 and Eli Lilly’s from $4.65 to $10.68. With spreads that wide, a beat may end up saying more about the forecaster than the company, and any disappointment is likely to be punished with some enthusiasm.

The bear case: why this could be more than a blip

The trouble with a market led by one theme is that it can be led down by that theme just as easily, and since tech and AI make up such a large share of S&P 500 market capitalisation, a sustained rotation out of these names could hit the index far harder than the headline count of stocks would suggest. Korea has just provided a preview.

Then there’s oil, with Brent touching $110 a barrel for the first time since May thanks to a combination of Middle East supply fears and a Ukrainian strike on a Russian refinery. Expensive energy has a habit of turning up in CPI sooner or later, which would give the Fed yet another reason to sit on its hands and consumers one more reason to spend less.

Yields have eased, but only from uncomfortable to slightly less uncomfortable, with the US 10-year sitting around 5.1% and the 30-year at 5.44%. At those levels bonds start to look like a perfectly reasonable alternative to expensive growth stocks, which means multiples are likely to stay under pressure, and riots in France alongside a widening Middle East conflict complete a backdrop that is hard to describe as reassuring.

Historical parallels and what they tell us

Precedent, unhelpfully, cuts both ways. In the fourth quarter of 2018, rising yields and a Fed that insisted on tightening took the S&P 500 down almost 20% from peak to trough, while in 2022 the repricing of rates knocked roughly a third off the Nasdaq, with long-duration tech stocks taking most of the punishment.

Then there’s April 2025, when the tariff shock pushed the S&P 500 to the edge of a bear market, only for the index to be back at record highs within three months as if nothing much had happened. This time the difference may well come down to yields and oil, since if both keep climbing then 2018 and 2022 look like the better guides, whereas if they fade, April 2025 might be the more useful template.

What could signal a turning point

​A few things to watch before deciding which one this is:

• ​The semiconductor index – ending the losing streak would be a start
• ​The VIX – a move above 20 would suggest this has stopped being a rotation
• ​Treasury yields – a sustained drop in the 10-year below 5% could take some pressure off valuations
• ​Brent crude – a retreat from $110 would ease inflation worries, if not cure them
• ​Megacap earnings – beats from Meta, Alphabet, Microsoft and NVIDIA could bring the dip buyers back in force

​If the megacaps deliver, the bulls may well be back in charge by November and last week will be remembered, if at all, as a buying opportunity, but if they don’t, the sell-off may only be getting started.