Global correction deepens as AI-fuelled valuations come under pressure
Global stocks fall as US sell-off over AI valuations spreads – this phrase now encapsulates the mood across international equity markets. Triggered by a sharp downturn in US tech stocks, driven by concerns over excessive valuations in the artificial intelligence (AI) sector, the correction has spilled over into Asia and Europe, shaking investor confidence worldwide.
On Tuesday, all major US indices closed in the red: the Nasdaq dropped nearly 2%, the S&P 500 lost around 1.2%, and the Dow Jones Industrial Average declined by more than 0.5%. This broad-based retreat marks the latest signal that markets may be re-evaluating the sustainability of the AI rally.
From optimism to scepticism: the AI valuation dilemma
Investor sentiment shifted decisively this week as leading Wall Street banks, including Goldman Sachs and Morgan Stanley, issued warnings of a potential 10–15% market pullback. These alerts landed just as several high-profile AI-focused companies – despite reporting strong quarterly earnings – saw their share prices tumble.
Palantir Technologies serves as a striking example. The data analytics firm saw its stock fall by nearly 8%, even after reporting solid revenue and profit growth. Investors appear increasingly unwilling to tolerate lofty valuations, even among well-performing AI firms.
Contagion hits Asia and beyond
The US-led sell-off quickly reverberated through Asian equity markets. Japan’s Nikkei 225 dropped as much as 5% intraday before closing down 2.8%, while South Korea’s Kospi lost approximately 3%. The heaviest declines were concentrated in semiconductor and tech sectors, underlining the global nature of the AI trade unwind.
This contagion effect highlights the interconnectedness of financial markets, particularly when sentiment shifts rapidly in sectors as globally exposed as technology and artificial intelligence.
Sky-high valuations face harsh reality checks
At the heart of the correction lies a growing mismatch between investor expectations and fundamental performance. Analysts have noted that the valuation premiums ascribed to AI companies – based on speculative future earnings – may no longer be sustainable in the face of tightening financial conditions and macroeconomic headwinds.
Metrics such as price-to-earnings ratios and growth projections are now under renewed scrutiny. As market participants reprice risk, the AI sector has become a lightning rod for broader fears about overvaluation.
Accelerants to the sell-off
Beyond valuation concerns, several additional factors have intensified the current pullback:
- Profit-taking activity following months of gains in tech-heavy indices.
- Rising bond yields, which weigh on growth stock multiples.
- Political uncertainty, particularly fears over a potential US government shutdown, adding to overall risk aversion.
Together, these forces have contributed to a steepening downturn, particularly in sectors previously viewed as high-conviction plays.
Strategic implications for investors
This market phase presents an opportunity for institutional investors to reassess portfolio exposure. A few key strategies emerge:
- Rebalance towards defensive sectors and lower-beta equities.
- Prioritise companies with strong cash flows, robust balance sheets, and realistic growth paths.
- Re-evaluate risk assumptions behind highly speculative AI bets, especially where valuations far exceed historical norms.
Furthermore, analysts suggest that the correction may not yet be complete. Some investment banks have floated scenarios of broader market drawdowns of up to 20% – a potential second leg to the current sell-off.
A wake-up call for AI-driven optimism
In summary, global stocks fall as US sell-off over AI valuations spreads is not merely a headline, but a defining moment in market sentiment. While the long-term promise of AI remains intact, short-term valuations are undergoing a much-needed reality check.
Investors and portfolio managers would do well to proceed with caution, re-grounding investment theses in fundamentals and preparing for potentially prolonged volatility.
