AI Market Cools as Nvidia OpenAI Deal Raises Valuation Concerns

The S&P 500 retreats on Tuesday, ending a three-day winning streak, as the recent artificial intelligence (AI) rally falters. The broad market index closes down 0.55% at 6,656.92, following a new all-time intraday high earlier in the session. The Nasdaq Composite falls nearly 1% to 22,573.47, with AI-focused stocks like Nvidia, Oracle, and Amazon leading the decline.

Nvidia's shares drop 2.8% after the company announces a $100 billion investment in OpenAI. The deal, initially seen as a positive move, now raises questions about the sustainability of the AI bull trend. Investors express concerns over the resemblance of the deal to the dot-com bubble, where customer and supplier relationships became overly intertwined.

Oracle, which has surged more than 50% in the past three months due to an optimistic AI sales forecast, sees its stock fall by 4.4%. Gil Luria, head of technology research at D.A. Davidson, comments, 'While the initial reaction to Nvidia's investment in OpenAI was positive, investors quickly realized that Nvidia may be OpenAI's only option to get the capital it needs right now, an investor of last resort.'

Federal Reserve Chair Jerome Powell adds to the valuation concerns, stating that 'equity prices are fairly highly valued.' He also signals that the path to rate cuts remains uncertain, describing the situation as 'challenging.'

Despite the broader market's losses, the small-cap Russell 2000 reaches an all-time high during the session, driven by enthusiasm over a recent Fed rate cut. However, it ultimately closes down 0.2%.

Investors now await Friday's release of the personal consumption expenditures price index, the Fed's preferred inflation measure. Additionally, the increasing likelihood of a government shutdown ahead of the Sept. 30 deadline looms, with Trump canceling a planned meeting with top Democrats, citing that no meeting 'could possibly be productive.'

References

• S&P 500 closes lower, snapping 3-day winning streak, as AI trade in Nvidia fizzles; Powell hints stocks are overvalued