The $1 Trillion Wipeout on the Stock Market is an Example of What Can Happen When Ai Bets Go Wrong

U.S. stocks experienced a massive selloff on Monday, erasing $1 trillion in market value. This marked the second time this year that equities suffered such a sharp decline in a single session, according to Dow Jones Market Data.

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Tuesday’s trading session provided some relief, with stocks rebounding strongly. Nvidia Corp. saw its shares climb nearly 9% after plunging 17% the day before. Monday’s decline pushed the stock below its 200-day moving average for the first time since early 2023. However, the dramatic start to the week highlighted a potential vulnerability in the ongoing market rally—one that could pose challenges for investors in the future.

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Over the past few years, a small group of stocks has driven much of the market’s gains. This concentration becomes a concern when those same stocks begin to decline, as their influence can lead to broader market downturns. Monday’s trading illustrated this phenomenon. Despite more than 350 stocks in the S&P 500 rising that day, the index still fell due to sharp losses in Nvidia and other major technology firms.

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Gains in certain tech sectors were not enough to offset the losses. Semiconductor stocks led the declines, with key names such as Microsoft, Amazon, Alphabet, and Tesla also ending the day lower. However, Apple and Meta Platforms bucked the trend, closing in positive territory, along with several software companies.

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Despite this divergence, the overall market struggled. Both the S&P 500 and the Nasdaq Composite posted steep losses, while the Dow Jones Industrial Average, which has less exposure to technology stocks, managed to finish slightly higher.

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The downturn came at a time when investor optimism was particularly high. Jason Browne, a portfolio manager at Alexis Investment Partners, pointed out that markets often face corrections when enthusiasm peaks. Recent fund flow data from EPFR reflected this sentiment, showing that over $276 billion had poured into equity funds in the past three months—an unusually high pace. In fact, U.S. equity funds recorded their largest inflows on record during the fourth quarter.

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Monday’s market action was highly unusual. According to Jason Goepfert of SentimenTrader, it was the first time in history that the S&P 500 dropped nearly 1.5% while over 300 of its constituents gained. Only three prior instances had come close, and all occurred around the peak of the dot-com bubble in early 2000.

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While the selloff unnerved some investors, others viewed it as a buying opportunity. Browne suggested that the dip would likely entice investors to purchase popular stocks at a discount.

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However, market data indicates that traders are bracing for additional volatility. Henry Schwartz, vice president of market intelligence at Cboe Global Markets, reported a sharp increase in demand for call options linked to the Cboe Volatility Index (VIX), commonly known as Wall Street’s “fear gauge.”

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The average daily trading volume for VIX calls in January has exceeded 650,000 contracts, up 38% from December. If this trend continues, January could see the highest volume in VIX call trading since the “growth scare” that unsettled markets in late summer.

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Meanwhile, the ratio of put options to call options on the VIX has dropped to about 0.5, meaning twice as many calls are being traded as puts. This suggests that many investors are betting on increased volatility, which typically coincides with stock market declines.

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Nvidia and its four largest customers—Microsoft, Alphabet, Amazon, and Meta—have played an outsized role in the S&P 500’s gains over the past two years. Société Générale estimates that these five stocks have contributed around 700 points to the index during this period. Without them, the S&P 500 would be roughly 12 percentage points lower. Nvidia alone has accounted for a 4-percentage-point gain in the index’s performance.

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This heavy concentration has made the broader market vulnerable. When just a few stocks experience sharp declines, the entire index can suffer, impacting investors who hold passive index-tracking mutual funds and ETFs.

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Monday’s selloff was partly driven by concerns over the latest advancements in artificial intelligence. DeepSeek, a Chinese AI company, unveiled new generative AI models that appeared to rival those of leading U.S. firms, despite being trained at a fraction of the cost and without Nvidia’s most advanced chips.

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Over the weekend, DeepSeek’s AI chatbot became the most downloaded app in Apple’s App Store. This raised questions about whether the aggressive spending by U.S. tech giants on AI-related infrastructure and Nvidia chips was truly necessary. Nvidia, in particular, felt the brunt of this uncertainty.

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While these developments initially triggered concerns, they could ultimately benefit the broader U.S. economy. Browne noted that lowering AI-related costs could make the technology more accessible to more businesses, accelerating adoption and potentially driving corporate earnings higher. If this happens, it might help justify the stock market’s lofty valuations.

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However, the transition could also bring significant short-term volatility, as investors reevaluate their positions in high-flying AI stocks.

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Aside from AI-related uncertainties, investors are also preparing for key events in the coming days. On Wednesday, Federal Reserve Chair Jerome Powell is set to deliver remarks following the central bank’s latest interest rate decision. Additionally, major technology companies are gearing up to report their quarterly earnings, which could further influence market sentiment.

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Despite Monday’s turbulence, U.S. stocks rebounded sharply on Tuesday. The S&P 500 climbed 0.9% to close at 6,067.70, while the Dow added 0.3%, finishing at 44,850.35. The Nasdaq led the gains, surging 2% to end at 19,733.59.

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