The biggest drop of the Nasdaq and an uncomfortable question about artificial intelligence

The Nasdaq suffered its largest daily point drop in history on Friday, June 5. And while the media tends to focus on the news of the day, what is truly interesting is to ask what the market is telling us behind that movement.

In recent years, stocks linked to artificial intelligence have seen one of the largest rises in modern history. Nvidia has become one of the most valuable companies on the planet. Microsoft, Google, Amazon, and Meta announced multi-billion dollar investments in data centers. Companies like OpenAI and Anthropic reached valuations that just a few years ago seemed impossible.

The narrative is well-known: artificial intelligence will change the economy, increase productivity, and transform the way we work. And that is probably true.

However, there is one fact that should catch the attention of any investor: More than half of the total value of the S&P 500 is concentrated in companies that are trading at more than ten times their annual sales. Historically, such valuations were reserved for exceptional companies. Today, we are no longer talking about a few isolated firms. We are talking about a huge part of the U.S. market.

The list includes names like Nvidia, Apple, Microsoft, Alphabet, Broadcom, Oracle, AMD, Micron, Tesla, and dozens of other companies.

What does this mean?

It means that the market is not only expecting growth. It expects extraordinary growth for many years. When a company trades at such multiples, it is no longer enough to execute well. It has to meet almost perfect expectations.

And that is precisely the problem.

Current prices reflect enormous confidence that the artificial intelligence revolution will generate gigantic profits in the future. But one thing is for a technology to change the world, and quite another is for all the investments made around that technology to generate the expected returns.

Financial history is full of examples

Internet changed the world forever. However, many of the most popular companies from the dot-com bubble ended up disappearing. Telecommunications indeed transformed the global economy, but companies like Lucent Technologies, Global Crossing, or WorldCom destroyed enormous amounts of capital because investments grew much faster than demand.

The same happened in other sectors. The 2008 real estate boom ultimately demonstrated that a great story can coexist with completely irrational prices. The rise of U.S. shale transformed global energy production, but for years many companies in the sector lost money because investment grew faster than profitability.

Artificial intelligence could face a similar challenge. Not because the technology doesn't work. Not because OpenAI, Anthropic, or Nvidia don't have extraordinary products. But because financial markets often get ahead of reality.

Today, billions of dollars are being allocated to building data centers, buying chips, developing models, and expanding infrastructure. The market assumes that all this investment will be absorbed by a gigantic future demand. And that may happen.

But if growth turns out to be slower than expected, if profitability takes longer to appear, or if expectations were too optimistic, corrections could be much more violent than most imagine.

That is why the recent drop in the Nasdaq deserves attention.

Not necessarily because it marks the end of the artificial intelligence boom. It is very possible that we are facing a transformative technology that will continue to expand for decades.

But yes, because it reminds us of a fundamental lesson of the markets: when investors discount a perfect future, any disappointment can lead to unexpectedly large movements.

The question is not whether artificial intelligence will change the world. The question is whether the stocks leading that revolution have already incorporated too much optimism into their prices.

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