Benchmark indices on Wall Street had a down day on Wednesday, October 14, as AI-led stocks sold-off sharply on rising debt concerns and fears of higher interest rates owing to the September CPI print.
The Dow Jones recovered more than 260 points from the lows of the day to end just below the flat line. However, there was no such recovery seen on the S&P 500, which fell 1%, and on the Nasdaq Composite and the Nasdaq 100 indices, both of which saw a drop of 2% each. The Russell 2000, which houses smallcap stocks, entered a “technical correction”, meaning a fall of over 10% from its August peak.
With Wednesday’s fall, the S&P 500 ended a six-year long streak of sessions without a 1% fall. The index went without a 1% fall for 53 straight sessions before Wednesday, the longest since January 2020.
What Triggered The Sell-off In Semiconductor and AI Hardware Stocks?
Nearly every single hardware / AI / semiconductor related stock saw steep losses on Wednesday. Nvidia and AMD shares fell 3% and 6% respectively, while the smaller names saw a bigger drop.
Shares of Intel, HPE, Dell, Micron, Sandisk, Western Digital, saw losses that ranged from 4% to as much as 11%. The two major stocks that led the sell-off were CoreWeave, which fell 15% and Oracle Corp, which fell 9%. Both stocks sold off sharply over concerns about the rising yields on their existing debt and whether they have borrowed too much to build out the AI infrastructure.
| Semiconductor / AI Stocks | Wednesday’s Fall (%) |
|---|---|
| Nvidia | -3.2 |
| AMD | -5.7 |
| Broadcom | -3.1 |
| Intel | -4.5 |
| HPE | -8.2 |
| Dell | -11.3 |
| Micron | -4 |
| Sandisk | -5 |
| Western Digital | -4.5 |
| CoreWeave | -9 |
| Oracle Corp | -15.5 |
CoreWeave’s debt, which matures in 2032, saw yields touching as high as 15%, prompting Elon Musk to tweet about the same with a “Yikes” remark. Credit-default swaps are now pricing in a more than 50% chance of a default within the next five years. Its yield to maturity, or the total annualized return expected on a bond held till maturity date, on its 9.625% bond due in 2032 surged to 14.8%, while the yield on the 9.75% bond due in 2031 surged to 14.9%.
However, CoreWeave’s CEO remained defiant, saying the market is acting “irrationally”, and that the company has enough order backlog to service its debt obligations.
A similar story beckoned Oracle Corp., which has already faced concerns with regards to its mounting debt. The yield to maturity on its 6.25% bond due in November 2032 surged to 7.24%. The stock plunged 9%.
Additionally, shares of HPE, Dell, and NetApp were downgraded by Barclays, stating that they have not seen a meaningful AI inflection of enterprise spending on these companies, and that their stronger revenues were due to higher prices and not a sign of a shift towards enterprise AI. The firm went on to warn that the eventually normalization in the memory chip market, which results in a fall in prices, will impact their infrastructure revenue. Dell shares fell 11%, having gained over 300% YTD, while those of HPE were also down over 8%, and have gained more than 160% so far this year.
A word of warning came from BlackRock CEO Larry Fink as well, saying that in case the constructions of data centers stops, it could trigger an economic slowdown, or even a recession.
US indices had started off on a negative note after the September CPI print, which at 3.7% year-on-year, was higher than expectations of 3.6%. Even the Core CPI print of 2.6% was higher than the 2.5% estimate. This increased the probability of the US Federal Reserve increasing its benchmark interest rate by 25 basis points to 37% from 23% earlier, according to the CME FedWatch tool. The 10-year bond yield sold off sharply after the news to 5.32%, but cooled off soon after to head back to the 5.19% mark.
Both, Bank of America and Morgan Stanley delivered results that disappointed Wall Street. Bank of America shares fell as much as 8% before recovering to end 5% lower after a $1.2 billion penalty and a sub-par trading operations performance hurt its earnings, while Morgan Stanley recovered from the lows to end 3% lower despite its trading income surpassing Wall Street estimates by a cool $900 million.
All eyes today will be on the September wholesale inflation print, and results from companies such as TSMC, along with the jobless claims and retail sales data.