China’s AI bubble has burst, and the index has plunged 40%. Is the S&P 500 next?
China’s AI index lost 40% without a single piece of bad news. A shift in sentiment was enough. The U.S. market has so far avoided a similar correction, even though seven companies make up more than a third of the S&P 500 and Meta spent more than it earned for the first time since 2012. So the risk isn’t in China. It’s hiding closer than most investors are willing to admit.
Key points
China’s artificial intelligence index fell 40% in four months, and no one can point to a trigger.
Seven companies account for 35% of the S&P 500’s value, up from 13% in 2018.
Meta beat expectations, yet its shares dragged the entire Nasdaq lower the next day.
The four biggest hyperscalers will invest around $730 billion this year, more than Walmart’s annual revenue.
Microsoft, Alphabet and Amazon report this week, and the Fed meets on the same day.
It burst without a trigger
If you’re waiting for some big news to tell you the AI bubble has burst, China has just proved you wrong. The STAR50 index, which tracks Shanghai’s chip and AI leaders, fell 40% in less than four months, wiping out around $480 billion in market value. The broad CSI 300 index has fallen for ten straight weeks and closed on October 22 20% below its June peak—the textbook definition of a bear market.
The most interesting thing is what’s missing. According to traders interviewed by Reuters, there was no obvious selling catalyst. Just high prices, tax bills and the threat that the United States and other countries would ban Chinese components from their data centers. That was enough.
Retail investors’ favorites took the biggest hit. Robot maker Unitree, whose IPO was oversubscribed 8,000 times among retail investors, has lost half its value since its August debut. Chipmakers Moore Threads and MetaX, which jumped 400% and 700% on their first day of trading, are also down by half since July. Memory chipmaker CXMT shed more than a quarter of its value in a month.
This is a lesson for anyone with AI stocks in their portfolio: a bubble doesn’t need bad news to burst. It only needs new buyers to run out.