The Tech Stocks Selloff Spells Trouble for the AI Trade. Why Markets Are Twitchy.

An unexpected tech selloff has woken the market from its summer snooze.

Investors may have been dreaming of a calm week, culminating in Federal Reserve Chair Jerome Powell signaling multiple rate cuts ahead and more gains for stocks.

That may still happen, but Tuesday provided a reminder of how reliant the market is on tech companies and the artificial-intelligence boom. The S&P 500 fell for a third consecutive day despite a decent performance by the majority of its constituents—more than 350 of the index’s stocks finished higher.

The year’s winners suddenly became yesterday’s losers. Palantir led the way lower, tumbling 9%. AI server maker Super Micro Computer, chip maker AMD, and software company Oracle were also among the biggest decliners.

But the selloff was indiscriminate, most tech stocks were caught up in it—the bigger the rise this year, the harder the fall yesterday.

There were a couple of catalysts but nothing that really warranted the pressure. OpenAI CEO Sam Altman warned that AI is in a bubble, while an MIT report concluded that 95% of generative AI initiatives at companies are failing to achieve rapid revenue growth.

The big moves off relatively little news suggests a nervousness creeping in when it comes to the AI trade. It could also be profit-taking or a summer slump, but perhaps investors are finally starting to get twitchy about valuations.

The market may quickly get reassurance, or otherwise, when Nvidia—another sharp faller Tuesday—reports earnings next week.

In isolation, investors won’t lose any sleep over the selloff but if it’s a prelude to the AI bubble bursting then it could turn into a nightmare for the stock market.

—Callum Keown

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Palantir and Software Stocks Get Hammered in AI Scare

The risk of a deeper selloff for megacap software stocks including Palantir, Oracle, Microsoft, and CrowdStrike is rising after a big market pullback.

• Palantir, with a market value of about $375 billion, fell 9.4% on Tuesday and Oracle dropped 5.8%. Microsoft lost 1.4% and CrowdStrike slipped 1.8%. Chip stocks also retreated. Nvidia fell 3.5% and AMD declined 5.4%.
• A warning from artificial intelligence guru Sam Altman, who leads OpenAI, that some stocks in the sector could be overvalued may have helped trigger a selloff. The head of the ChatGPT developer reportedly said investors had become “overexcited” about AI, even amid reports his company is set to be valued at $500 billion in an employee share sale.
• For Palantir, it’s possible that some investors have been taking profits after an astounding bull run. The stock has climbed 118% this year and an eye-watering 409% over the past 52 weeks, driven by the data-analytics company’s government contract wins and strong earnings, becoming the market’s favorite AI software stock.
• The iShares Expanded Tech-Software Sector exchange-traded fund shows a notable technical breakdown. On Tuesday, the ETF, which fell 1.6% to $106.58, undercut its 50-day simple moving average for the first time since Feb. 21. The tech-heavy Nasdaq finished the day down 1.5%.

What’s Next: It remains to be seen whether the pullback is a temporary dip or the start of a bigger slump. It may signal a shift in investor sentiment away from high-growth technology names and into value stocks that have largely been left behind so far this year.

—Nate Wolf, Doug Busch, and Steve Goldstein

Railroad CSX Faces Mounting Pressure to Find a Deal

CSX has been under pressure to find a deal that would expand its rail network ever since rivals Norfolk Southern and Union Pacific agreed to a tie-up that would create a transnational railway. Now, the activist fund Ancora is raising the stakes, warning CSX to act quickly or risk impairing its long-term value.

• The hedge fund sent a letter to CSX earlier this month and made it public on Tuesday telling it to pursue talks with Berkshire Hathaway-owned BNSF Railway and the Alberta-based Canadian Pacific Kansas City Limited. It urged the board to officially say it’s working with advisors to explore options.
• CSX told Barron’s that it welcomes all opportunities to enhance shareholder value and that it appreciates the input of its shareholders and engages regularly with them. But Ancora worries that CSX might miss out on opportunities if it waits, according to the letter, which criticizes management.
• The letter suggests a tie-up with Canadian Pacific may be the best option. To get around any difficulties with regulatory approval by the U.S. for an acquisition by a Canadian company, Ancora said a transaction could be structured as a reverse merger under which CSX acquires CPKC.
• Union Pacific’s $71.5 billion merger with Norfolk Southern is likely to attract heavy regulatory scrutiny. While CSX hasn’t announced any specific talks, CEO Joseph Hinrichs said in July that there are many