A rout in AI and tech stocks has wiped trillions off global markets. For City AM’s Midday Markets newsletter, Ali Lyon chews over what it all means.

It’s been one of those mornings when analysts have woken up and reached for their morbid bon mots of choice. “Bloodbath” has proven popular. So too, “capitulation-level event” or “sea of red”. And others have simply opted for an unadorned: “extraordinary.”

Whatever one’s preferred descriptor, there is only one markets story on town this Friday: the historic, tech-driven sell-off afoot in global markets, and whether the AI revolution has gone from boom, to bubble, to crash.

Before we get into why this is happening, and what it might all mean, it’s worth reflecting on the events that led us here. It all started, really, when traders began to digest the consequences of this week’s US midterms.

As well as the cost of living – not to mention voters’ enormous misgivings at the Trump administration’s unapologetic cronyism – data centers were firmly on the ballot this Tuesday. And as the ‘blue-nami’ swept through the world’s largest economy, it was clear the scale of the Democrats’ win would presage a slowdown in America’s AI infrastructure rollout.

At US market open on Thursday, the Nasdaq and New York’s S&P 500 fell four per cent and three per cent respectively.

And since then, contagion has well and truly set in, with tech-heavy Asian stock markets all notching up serious falls. The Nikkei – Japan’s blue-chip index – dropped over six per cent while we were all asleep. As did Korea’s Kospi, which has become a bellwether for AI sentiment and was forced to halt trading amid liquidity concerns.

In all, trillions have been wiped off global stock markets, in a rout that has led some investors openly to speculate whether the artificial intelligence boom that has defined the past few years in markets is now firmly in reverse.

What does the AI sell-off mean?

There are, in my mind, three big things worth noting in and among all this. First is that, while today’s rout is striking in its severity, it by no means represents a sudden or drastic change.

Tech stocks – particularly those most exposed to the furthest excesses of AI exuberance – have been on a downward trend for much of the past couple of months.

Companies like Sandisk – which makes memory chips for data centers – may have fallen by 22 per cent yesterday, but that fall was itself off the back of a 45 per cent drop in the preceding month-and-a-bit. And most of the the so-called hyperscalers – Nvidia, Meta, Alphabet and Tesla – are all trading considerably down on the start of the year.

Second, even if this is the start of a period of protracted share price falls, it would by no means herald the end of the AI boom at large. Firms and individuals are still adopting the technology at a rate of knots – and the productivity boom derived from it is by no means jeopardised by today’s shift in market sentiment.

Think back to the dotcom bubble of the early noughties. Investors got well ahead of their skis then, too. Pets.com – the poster child of worldwide web enthusiasm – reached peak valuation of $400m despite only ever generating $5m in revenue and losing over $60m a year. But its overdue crash did not stop the internet becoming the defining innovation of its time, nor slow folks’ adoption of it.

One thing that is certainly worth keeping an eye on though – the final element of the three – is what it may mean for the US and global economies. There is an understandable view in some quarters that the fate of the stock market is dislocated from that of the real economy: that Wall Street and Main Street don’t interact as much as one might think. But – and this is especially true in the US – the ‘wealth effect’ as it is known is a powerful thing.

If people look at their pension pot or stocks and shares Isa over here – or their individual retirement account the US – and they see it looking healthy, they’re more likely to buy that car for which they have been pining, or go our for that indulgent dinner. But when it looks less rosy, as will be the case today, then the opposite is true. Demand consequently slows, and economies grind to a halt.

All of which, is a very long-winded way of saying, there’s a lot going on in AI and markets at the moment. And no-one, least of all me, can say for certain where we’ll find ourselves next.