On Wednesday, investors felt disappointed about the prospects of artificial intelligence, causing the evaporation of 1 trillion USD as people questioned how long it will take for a return on investment from the large amount of investment in AI technology. The Nasdaq index fell by more than 3.6%, marking its worst performance since October 2022. Among the underperformers, the darlings of AI technology were prominent, including semiconductors companies such as Broadcom, which led to the release of a mediocre financial report that featured an inflated capital expenditure in the evening of Tuesday, causing a more than 5% drop in the company's stock price, marking its worst performance since January. The stock price of the company plummeted more than 12% after CEO Musk provided few details about the company's autonomous driving car plans. Alec Young, Chief Investment Strategist at Mapsignals, said: "The biggest question is where is the return on investment for all the AI infrastructure spending? Too much money is being spent right now. Maybe there will be returns in a few years. But I think investors realize that returns take time to materialize, and the profit of such large-scale companies will be damaged in the short term due to their expenditure in this area." As a result, traders now have to pay a higher price to hedge tech stock volatility. The volatility of Nvidia's options rose to its highest level since mid-March, and the put option premium of Broadcom reached its highest level in three months.$NASDAQ 100 Index (.NDX.US)$The weather is good today The weather is good today.

Please use your Futubull account to access the feature.$NVIDIA (NVDA.US)$,$Broadcom (AVGO.US)$And.$Arm Holdings (ARM.US)$The Nasdaq index fell by more than 3.6%, marking its worst performance since October 2022. Among the underperformers, the darlings of AI technology were prominent, including semiconductors companies such as Broadcom.$Alphabet-A (GOOGL.US)$The company released a mediocre financial report that featured an inflated capital expenditure on Tuesday evening, causing a more than 5% drop in the company's stock price, marking its worst performance since January.$Tesla (TSLA.US)$The stock price plummeted more than 12% after CEO Musk provided few details about the company's autonomous driving car plans.

Alec Young, Chief Investment Strategist at Mapsignals, said: "The biggest question is where is the return on investment for all the AI infrastructure spending? Too much money is being spent right now. Maybe there will be returns in a few years. But I think investors realize that returns take time to materialize, and the profit of such large-scale companies will be damaged in the short term due to their expenditure in this area."

As a result, traders now have to pay a higher price to hedge tech stock volatility. The volatility of Nvidia's options rose to its highest level since mid-March, and the put option premium of Broadcom reached its highest level in three months.

Two weeks ago, lower-than-expected inflation data released in the US sparked a massive rotation from technology stocks to companies that benefit the most from a Fed interest rate cut (mainly small-cap stocks).

This Wednesday, small-cap stocks continued their outperformance for the fourth consecutive trading day over large-cap stocks, also the 10th time in 11 days that small-cap stocks have outperformed large-cap stocks. The S&P 500 index rose by 0.5%, while the Nasdaq 100 index fell by 2.6%.$Russell 2000 Index (.RUT.US)$The S&P 500 index rose by 0.5%,$S&P 500 Index (.SPX.US)$The Nasdaq 100 index fell by 1.5%.

Violent selling

Although the rotation of tech stocks continues, the violent fluctuations suggest that there are hidden secrets. Specifically, investors seem to be increasingly listening to the voices in some circles on Wall Street that the rise of artificial intelligence has fueled a bubble, making the S&P 500 index appreciate by 9 trillion USD in the past year, and the rise of artificial intelligence is bound to collapse. Although Wednesday may not be the beginning of the collapse, the magnitude of the decline is worrying.

Neville Javeri, portfolio manager at Allspring Global Investments, said: "In the short term, there may be a little AI fatigue, because some investments by big tech companies in AI may not generate the expected returns within the expected time of investors."

Hardware manufacturers for AI computing experienced some of the biggest declines on Wednesday after a soar earlier this year.$Super Micro Computer (SMCI.US)$Nvidia fell 9.15%, Broadcom fell 7.6%, and super high market cap stocks also fell, including the 5.6% drop of Google's parent company Alphabet.$Meta Platforms (META.US)$$Microsoft (MSFT.US)$Dropped 3.6%.$Apple (AAPL.US)$Dropped 2.9%.

However, other traders believe these changes are only temporary.

Michael Sansoterra, chief investment officer of Silvant Capital Management, said:'I think what you're seeing is some profit taking with some stocks that have done particularly well, have had very strong returns year-to-date, as Google hasn't surprised as much.'

The sell-off knocked down the so-called 'Big 7' technology stocks index by 5.9%, the first time it's fallen below the 50-day average price since May. The index is still up 33% since the beginning of the year.

Concerns about the AI bubble.

More and more market professionals believe that the commercial prospects of AI have been over-hyped and question the enormous costs of building the infrastructure needed to run and train large language models. Jim Covello, the stock research head of Goldman Sachs, is one of them.

Activity in the derivatives market has fueled discussions about an AI bubble. Investors have been buying call options on indices and individual stocks, particularly Nvidia, which have acted as 'rocket fuel' during the surge. As tech stocks have picked up pace, this sentiment has changed and is likely to have intensified Wednesday's sell-off.

For instance, demand for put options on Nvidia surpassed that for call options last week, reaching the highest level in five months. Profit-taking tail risk hedging, in the event of a stock market crash (which could be as much as 30% drop), has risen at the fastest pace since October last year. The cost of preventing a fall of around 10% in stock prices has reached its highest level since August 2023.

Tech valuations have entered the most inflated area in history. Two weeks ago, the PE ratio of the S&P 500 Information Technology Index reached its highest level since 2002. Despite the sell-off, the prices of many big tech stocks remain at stunning levels. Nvidia's expected profit in the next 12 months is 36 times, while the S&P 500 index's average is 21 times. Apple and Microsoft are priced at over 30 times. This increases the risk of profitability at an embarrassing moment when profits of the tech giants slow down.

Although Alphabet's results seem to have dashed hopes that AI would make a greater contribution to the financial performance of giant companies, investors have not heard from other giant companies yet. Microsoft will release its earnings report on July 30th, followed by Meta Platforms, Apple and Nvidia the week after. $Amazon (AMZN.US)$The greatest beneficiary of AI spending, Nvidia, will report its final earnings on August 28th.

Cayla Seder, macro multi-asset strategist at DWS, said: 'We still cling to our views of large-cap stocks, quality stocks, and growth stocks because they are a more attractive choice in terms of earnings growth and fundamentals, even if people feel uneasy about the returns of tech stocks.'

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