Nasdaq-100 in Correction: Is the AI Trade Over or Just on Pause?

Another turbulent, headline-driven week ended in the red, extending the losing streak to five straight weeks – the longest such period since May 2022. The DJIA (DJIA) fell 0.90%, the S&P 500 (SPX) dropped by 2.12%, and the Nasdaq-100 (NDX) tumbled by 3.20%. The Dow joined the technology large-cap benchmark in correction territory, while the S&P 500 declined to about 9% below its January all-time high.

March is shaping up as one of the most painful months in recent years, as all three key indexes are down by at least 7% each through Friday, with two more trading days unlikely to improve the monthly results. Volatility remains high and appears to be persisting into the next earnings season, scheduled to begin in just over two weeks.

Though President Trump gave Iran’s regime until April 6 to negotiate before threatening its energy infrastructure, the warfare hasn’t subsided. Caution kept stocks down ahead of the weekend as more U.S. troops headed to the region, and the situation didn’t appear to be moving in the direction of de-escalation, to say the least. Stocks came under additional selling pressure on Friday, hit by this ongoing uncertainty and the renewed surge in oil prices, as well as the question marks around the Fed rate trajectory.

West Texas Intermediate futures climbed back toward $100 per barrel, while the global benchmark Brent reached $105 a barrel as continued disruption around the Strait of Hormuz reminded investors that geopolitics remains a powerful market driver. Meanwhile, the University of Michigan’s March consumer sentiment reading tumbled to a three-month low, as higher gas prices and a shakier market backdrop started weighing on confidence. Consumer sentiment had been gradually improving in recent months, making the sudden downturn even more striking.

Risk sentiment followed historical patterns, with the U.S. dollar continuing to strengthen over the past week. At the same time, traders increased bets on a more hawkish Federal Reserve amid concerns that surging oil prices could drive up inflation, reviving the “higher for longer” mantra. The 10-year Treasury yield climbed again, tightening the backdrop for risk assets, while the 2-year yield also rose sharply. The markets now assign roughly 20% odds that the Fed will raise rates by its September meeting, while assigning no probability to a rate cut in six months – compared to just one month ago, when odds of at least one rate cut by September were at over 90%.    

The stronger USD, combined with higher Treasury yields, is pressuring stocks through multiple channels. For stocks overall, this combination creates a propensity to exchange riskier assets for the relative safety of bonds, while international investors can now receive more of their currency by selling U.S. assets. Additionally, a large part of the S&P 500 – and most of Nasdaq-100 members – derive at least a third of their revenues from overseas. These will now be translated into fewer greenbacks, while more expensive exports may reduce foreign demand.

Although the largest threat from diminishing demand is for consumer goods, not for technology products and services that tend to be less vulnerable, tech stocks are definitely not immune – as reflected in a larger drop in the Nasdaq-100 than the Dow.  Besides the risk appetite squeeze due to tightening financial conditions, rising yields drive down the discounted future cash flows of growth stocks, hitting forward multiples.

All this creates an especially negative short-term setup for the AI trade, with stocks along the AI value chain – from NVIDIA (NVDA) to CoreWeave (CRWV) to Nebius (NBIS) to many more – hit by a triple whammy of risk aversion, sensitivity to yields from higher valuations and recalculated future growth, and fears of considerably higher power and other input bills. Of course, no short-term setback can quell the powerful hum of the rising AI economy – but its builders’ stocks are suffering at large.       

While the broader markets may try to stage a rebound at times, downward pressure on stocks is unlikely to ease without a meaningful pullback in crude and normalization in Treasury yields. Some analysts are advising to “keep calm and carry on,” while others foretell $200 oil if the Iran war – and particularly the Strait of Hormuz passage – isn’t resolved by the summer, with negative implications for the economy and stock markets.

Meanwhile, reassurance is arriving from some unexpected directions. Thus, one of the world’s most influential economists, Nouriel Roubini, aka “Dr. Doom” – known as such for his early prediction of the 2008 housing market bust – is uncharacteristically optimistic. Roubini is positive that once the Iran war is finished, the U.S. economy should return to its accelerating trend, supported by AI-driven productivity boost.

Professor Roubini is not alone on the happy shore of the Street. Barclays’ strategist Venu Krishna acknowledged the fragile macro backdrop, but advised remaining invested, adding that he is “incrementally bullish on U.S. equities, though the road likely stays bumpy until we turn a corner.” Truist’s CIO Keith Lerner opined that “equity risk/reward is incrementally improving, supported by a reset in valuations, sentiment, and technical conditions,” calling for measured cash deployment. All in all, while headlines are screaming “disaster,” capital is zooming in on assets that are becoming more compellingly priced.