US Stocks Tumble, Philadelphia Semiconductor Index Plunges 7%: What Caused the Market Drop?

TradingKey - On October 30, Eastern Time, U.S. tech stocks suffered a sell-off. The Nasdaq Composite Index fell over 2%, hitting a new low since August this year; the Philadelphia Semiconductor Index dropped over 7%, marking its largest single-day decline since June 5 this year; the Nasdaq 100 Index plummeted over 3% at one point, and the S&P 500 Index lost about 1.5%.

Intel (INTC) plummeted 30% at the open following its earnings report, dragging down the broader semiconductor sector. On the same day, Amazon (AMZN) reported weaker-than-expected results, further heightening market concerns over artificial intelligence (AI) investment returns and tech companies' cash flows.

JPMorgan's trading desk noted that renewed concerns over AI monetization are deepening sector rotation in the equity market, and the downturn in mega-cap tech stocks will weigh on broader market performance in the short term.

[Source: Google Finance]

Intel's financial report showed that the company expects fourth-quarter revenue of $15 billion to $16 billion, falling short of analysts' expectations of $17.07 billion. Although third-quarter revenue grew 21% year-over-year to $16.51 billion and adjusted earnings per share reached 52 cents, exceeding expectations, the weak outlook led investors to reassess its recovery trajectory.

Meanwhile, Amazon's third-quarter revenue and earnings per share both missed expectations, with growth in its retail and advertising businesses slowing. The company expects capital expenditures to remain at $220 billion this year and plans to continue expanding next year, while its free cash flow has recorded a negative deficit of $42.4 billion.

The market worries that massive infrastructure investments cannot be converted into cash flow quickly enough; if tech giants subsequently slow their spending, chip and equipment suppliers will take a hit. From a market perspective, the sell-off has spread across the supply chain, with Applied Materials (AMAT) falling nearly 5% and Lam Research (LRCX) dropping 5.5%.

However, Matt Orton, Chief Investment Strategist at Raymond James, believes the fundamental logic for beneficiaries of AI capital expenditure remains solid, and the temporary turn to negative free cash flow can still be digested, though investors need to re-examine overly crowded tech stock positions.