Wall Street calls for a pause and the first bets against Nvidia emerge

For months, the market has behaved as if gravity did not exist. Stocks soared, driven by seemingly endless enthusiasm, and artificial intelligence (AI) has become the new gold of the 21st century. However, in recent days the euphoria has given way to doubts. Top Wall Street executives, who usually celebrate expanding multiples, are now talking about the need for a cooldown.

The big investment banks say that valuations have gone too far and that a readjustment would be best to keep the foundations firm before the euphoria ends up breaking them. Goldman Sachs and Morgan Stanley agree on that idea. Both banks estimate that the main indices could fall between 10% and 20% in the next year without this representing a crisis, but rather a return to more sustainable levels.

Capital Group puts it another way. He does not see an imminent collapse, but admits that the margin for growth is so narrow that there is hardly any room for new surprises. Another analyst like Ed Yardeni, known for his almost chronic optimism and his interventions on CNBC, has warned that the S&P 500 could decline close to 5% before the end of the year.

The market is starting to move in that direction. The S&P 500 has fallen about 3% from its peak of 6,920 points. The Nasdaq, which reached 24,019 points, is now around 1% below those levels. In both cases they are moderate figures, nothing to panic, but could they symbolize a change of mood? After a year of near-vertical rises, investors seem willing to heed the warnings.

Nvidia overrated?

Nvidia appears at the center of this story. The company is the face of the AI ​​boom and its stock price reflects the collective enthusiasm for this trend. After reaching $212 per share, in just a few sessions it has fallen more than 11%, which is equivalent to a capitalization loss of more than $400 billion, according to data from Dow Jones Market Data. It is a figure that, by itself, equals the sum of the 44 smallest companies in the S&P 500.

The pressure on Nvidia coincides with a series of warnings from the offices of large managers. They repeat the idea that profit growth no longer keeps pace with stock prices. The S&P 500 multiple stands at 23 times its expected earnings, above the average of the last five years. This difference, which was previously seen as a reward for technological leadership, is now interpreted as an excess that can backfire if trust breaks down.

In the case of Nvidia, its current price-earnings ratio (PER) is around 58 times earnings, according to MarketScreener data, compared to a historical average of about 53 times in the last decade. Although high, this figure has already been higher: during 2020 and 2021 the company’s PER exceeded 80-90 times, reflecting even greater enthusiasm for its growth prospects. By comparison, the rest of the semiconductor sector trades at around 36 times earnings.

These numbers show that while the current enthusiasm for AI keeps Nvidia at challenging multiples, they are not the most extreme in its recent history. The difference is that now the company starts from a much higher profit base and faces a more competitive and regulatory environment.

Meanwhile, the first movements appear that transform theory into facts. Michael Burry, the manager known for anticipating and making $700 million from the 2008 mortgage crisis, has taken bearish positions through put options against Nvidia and Palantir worth more than $1 billion, according to Quiver Quantitative.

Added to the stock market correction is a new element that alters the balance of the sector. Google has unveiled its Ironwood chip, a seventh-generation tensor processing unit designed for large-scale AI tasks. Analysts describe it as the strongest alternative to Nvidia’s dominance and estimate its chip division could be worth up to $900 billion if it were spun off from Alphabet.

The news has come in the midst of Nvidia’s decline and has been interpreted as a sign that technological competition is accelerating. In this sense, large technology companies are preparing for a phase in which innovation will outweigh promises.

At the same time, Goldman Sachs strategists insist that a moderate correction could strengthen the cycle. They argue that the market needs to release pressure before excess liquidity and excessive expectations end up causing a more painful adjustment.

Morgan Stanley shares that diagnosis and warns that investors must get used to a less accommodating environment. In his opinion, the best scenario would be a controlled decline that returns prices to their usual relationship with business profits. For now, the falls are contained and the adjustment is progressing calmly.