A deepening sell-off gripped Wall Street on Tuesday, with U.S. stocks falling for a fourth consecutive session. The S&P 500 and Dow Jones Industrial Average both closed lower, dragged down by a broad sell-off spearheaded by technology giants, pushing major indices toward the brink of a technical correction. The market’s fear gauge jumped to a multi-month high, casting a shadow over hopes for a year-end rally as a retreat fueled by valuation concerns and shifting interest rate expectations threatens to intensify.
As of Tuesday’s close, the S&P 500 was down 0.8% and the Dow had fallen 1.1%, marking their longest losing streak since August 21. The tech-heavy Nasdaq Composite also fell 1.2%, declining for a second straight day. The recent rout has pushed several major indices close to “correction” territory, typically defined as a drop of at least 10% from a recent peak. The Dow has retreated roughly 4.5% from the record close it set just a week ago, while the small-cap benchmark Russell 2000 has fallen more than 5% from its high.
Despite the recent volatility, particularly driven by concerns over an AI technology bubble, the major indices remain up for the year. As of Tuesday, the S&P 500 had gained 13% year-to-date, the Dow was up 8%, and the Nasdaq had advanced an impressive 17%.
The sell-off has been widespread. Data shows that 324 stocks in the S&P 500 are down at least 10% from their 52-week highs, with tech giants, industrial stocks, and even Bitcoin falling. As market turbulence increased, investors flocked to traditional defensive sectors for safety. Healthcare and consumer staples held up relatively well. While gold prices retreated from their peak, they were still up 2.1% for November.
This stock market slump clouds the prospects for a traditional Santa Claus rally. However, some market analysts view a 5% pullback as normal and even technically overdue, given elevated tech valuations. Louis Navellier, Chairman and Chief Investment Officer of Navellier & Associates, noted that excessive concentration in tech giants and AI bubble fears have amplified the leverage in this correction. Fortunately, he pointed out, tech earnings have so far remained robust, with the main uncertainty being when productivity will improve and where profits will materialize.
Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, highlighted that tech companies are forced to make massive investments to meet surging demand, but this demand has yet to significantly translate into profits or productivity, raising investor questions about returns. She emphasized that AI is likely to deliver economic benefits in the future, but investors with heavy exposure to tech in their portfolios need to weather the current selling phase.
José Torres, Senior Economist at Interactive Brokers, stated that a combination of factors has shifted Wall Street into “risk-off” mode, and expectations for a Fed rate cut have also changed. According to the CME FedWatch Tool, traders on Tuesday saw just a 48.9% probability of a rate cut in December, a sharp drop from around 90% just before the October policy meeting. Brian Leonard, Portfolio Manager at Keeley Gabellan Funds, suggested this uncertainty is prompting investors to reassess positions and take profits, creating a snowball effect once the selling begins.
As market fear indicators climbed, investor anxiety intensified. CNN’s Fear & Greed Index fell to 13 on Tuesday, hitting its lowest level since April and reflecting “Extreme Fear” conditions. However, from a contrarian investing perspective, extreme pessimism often signals a potential market rebound. Michael Toomey, Managing Director of Equity Trading at Jefferies, believes a short-term bounce is likely, potentially led by the same momentum stocks currently being hit the hardest.
This week, investors are closely watching a major event that could set the market’s course: earnings from Nvidia (NVDA). Wall Street is eagerly awaiting fresh guidance from the AI bellwether to gauge whether the AI enthusiasm is justified or needs tempering. Torres noted that Nvidia’s performance update is critical for either justifying or calming excitement in the sector.
The market now holds its breath, searching for the next clear direction.
