The Contradictions at the Heart of the Worst November Stock Market Selloff Since 2008

Stocks are tumbling, AI concerns are mounting, and Bitcoin is in free fall. But investors remain bullish. (NYSE)

Key Points

• U.S. stocks are experiencing their worst November performance since 2008.
• Global investors show high bullishness, with cash levels at a 15-year low and U.S. stock positions at their highest since February.
• Concerns about an AI bubble are rising, with 45% of fund managers citing it as a major tail risk, and the VIX index jumping 45%.

The stock market is on pace for their worst performance in a November since 2008, while global investors are bullish at a level that hasn’t been seen in more than a decade. Something’s gotta give.

The contrarian signals sum up the challenging backdrop investors face heading into the final weeks of the year, with Nvidia earnings on Wednesday likely to define performance in a market beset with concerns over the pace of artificial-intelligence investments and the stretched valuations of the world’s biggest tech stocks.

The S&P 500 has fallen more than 3.8% for the month, paced by declines in megacap tech stocks, and closed below its 50-day moving average, a key performance benchmark, for the first time since April this week.

Global investors, however, continue to push the envelope on risk. Bank of America’s closely tracked Fund Managers’ Survey noted that cash levels of those polled are holding at the lowest levels in 15 years, while the overall position in U.S. stocks was at the highest since February.

Meanwhile, a majority of those polled described owning the so-called Magnificent Seven stocks as the market’s “most-crowded” trade, while around 45% said worries over an AI bubble were its biggest “tail risk.”

The positioning suggests investors remain committed to the AI and tech trade heading into Nvidia’s fiscal third-quarter earnings on Wednesday, but also are exhibiting signs that portions of it are giving them cause for concern.

In fact, the BofA survey noted that for the first time since 2005 a plurality of fund managers said companies are over-investing and would prefer them to focus on balance sheet improvement.

A separate BofA report, also published Tuesday, noted that Amazon.com, Alphabet , Meta Platforms, Microsoft , and Oracle have issued around $81 billion in AI-related debt over the past 2½ months.

Which is why the unveiling of a three-way tie-up between tech giants Nvidia and Microsoft, as well as AI start-up Anthropic, seems less than ideal. And oddly familiar.

Nvidia will take a $10 billion stake in Anthropic, with Microsoft investing $5 billion. Anthropic, in turn, will commit to buying $30 billion of Microsoft’s Azure compute, which itself will be powered by Nvidia’s Blackwell and Rubin processors. The stakes peg Anthropic’s value at around $350 billion.

The structure, of course, resembles the kind of arrangements that OpenAI has arranged with Nvidia, which is investing around $100 billion into the ChatGPT maker, and deals that include purchases from Oracle and a stake in Advanced Micro Devices.

The circular nature of all that spending, of course, is one of the key reasons investors have grown cautious of the AI investment boom, which includes billions in committed capital that has yet to demonstrate a clear line of sight toward profitability.

“Skepticism is higher now than at anytime over the last few years,” said Nancy Tengler, CEO at Laffer Tengler Investments. “Worries are certainly not limited to investment in the AI land grab but also profitability for the companies engaged in the most notable capex spend.”

“Nvidia will likely exceed earnings expectations but the question is whether investors will be mollified or not,” she added.

At present, that’s a tough question to answer. Risk appetite is fading quickly in other markets, with Bitcoin prices falling to the lowest levels in seven months and now trading some 27% south of the all-time high it reached in early October.

Wall Street’s fear gauge, the Cboe Group’s VIX index, has jumped 45% this month. The volatility benchmark now suggests daily swings of around 105 points, or 1.6%, for the S&P 500 into the end of the year.

Big investors like Michael Burry, meanwhile, are betting against some of the market’s most-iconic tech names while others, like Peter Thiel and SoftBank’s Masayoshi Son, are dumping their holdings of Nvidia.

Even Google CEO Sundar Pichai is joining the chorus of caution on the market’s hottest trade.

“Given the potential of this technology, the excitement is very rational,” he told the BBC in an interview published Tuesday. “But it’s also true that, as we go through these investment cycles, there are moments where we overshoot, collectively as an industry.”

“We can look back at the internet right now. There was clearly a lot of excess investment, but none of us would question whether the internet was profound,” he added. “I expect AI to be the same.”

It’s this kind of nuance that keeps James Demmert, chief investment officer at Main Street Research, optimistic.

“All technology revolutions create bubblelike stock price performance—but this bubble is still inflating at a healthy pace with no signs of popping anytime soon,” he said.

“The stock market’s recent pullback is a natural reset for a market that had very little volatility in recent months,” he added. “While it’s unusual to see a market pullback in November, it’s setting us up nicely for a strong December and year-end.”

Write to Martin Baccardax at martin.baccardax@barrons.com