AI valuations crack, $23 billion vanishes, contagion spreads

The 240x fantasy finally met a bidless tape

Palantir beat on revenue and profit. Its stock still fell hard. That split—solid operations, shrinking multiples—was the spark that turned weeks of nervous murmurs into a full-on risk reset across AI darlings, crypto, and Asia’s chip complex. By day’s end, warnings from senior Wall Street chiefs at Hong Kong’s finance summit gave big portfolios cover to de-risk into year-end.

The Breakdown

• Palantir's 250x forward P/E mattered more than beating earnings, triggering 8% drop

• Wall Street chiefs coordinated 10-20% correction warnings at Hong Kong summit

• AI capex surging without revenue visibility as Microsoft hits $35B quarterly spend

• Seven megacaps masked weakness in 493 other S&P stocks, creating concentration trap

What actually changed

A line finally snapped: price overrode prints. Palantir’s results were fine, but investors balked at paying roughly 250 times forward earnings and sold anyway. Multiples, not margins, drove the tape.

The concentration risk everyone debated all year showed up in a single session. The S&P 500’s megacaps masked weakness in the other 493 names; remove the leaders and the market’s valuation looks ordinary again. When leaders wobble, the mask slips fast.

The banking chiefs’ warning shot

At Hong Kong’s Global Financial Leaders’ Investment Summit, Morgan Stanley’s Ted Pick and Goldman Sachs’ David Solomon both framed a 10–20% drawdown as plausible—normal, even—after an AI-led melt-up. That reframed lower prices as discipline rather than drama, and traders acted accordingly.

One more accelerant helped. Michael Burry disclosed bearish option positions in Palantir and Nvidia. Whatever you think of his hit rate, his filings reset the day’s story line. It landed on a market already leaning toward caution.

Asia catches the downdraft

The aftershock hit overnight. Korea’s Kospi fell as much as 6.2% intraday, with Samsung and SK Hynix sliding; Japan’s Nikkei dropped nearly 5%. SoftBank—levered to AI via Arm and other bets—lost over 10% and erased tens of billions in value. This wasn’t froth. These are the suppliers and financiers of the AI build-out, and they traded like momentum names.

Crypto didn’t hedge

Bitcoin briefly broke below $100,000 for the first time in months. The supposed diversifier moved with speculative tech instead of against it. When liquidity retreats, correlations converge. It did.

Beneath the screen: a capital-efficiency problem

The deeper worry isn’t one quarter’s earnings. It’s the math behind the great AI build-out. Big Tech keeps lifting data-center capex far faster than revenue visibility. Microsoft posted a record quarter of almost $35 billion in capex and signaled more to come; Meta raised its 2025 range to roughly $70–72 billion while talking up even bigger 2026 spend. Build first; monetize later. Investors can fund that tension for a long time—until they can’t.

Boards face a prisoner’s-dilemma version of the cloud arms race. Pause, and you risk irrelevance. Accelerate, and you risk overcapacity and thinner returns. Reuters’ analysis notes sales-to-capex ratios sliding as outlays on chips and campuses outrun the revenue curve. The result is simple: the bar for proof just rose.

Structure finally matters again

All year, cap-weighted gains made the market look healthier than it was. Equal-weight told the truth about breadth. Tuesday’s tape made that gap visible in hours: the leaders became the liability, and the rest couldn’t offset them. That’s how deleveraging starts. It’s sudden. Then it’s broad.

The data vacuum doesn’t help

A federal shutdown has paused many official U.S. economic releases just as the Fed heads toward its December decision. With jobs, inflation, and spending reports delayed, policy debate leans on inference instead of fresh numbers. Markets fill the silence with stories and price them.

Where this leaves investors

Two things cure a valuation shock: cheaper prices or faster cash flow. Some names will deliver the latter. Many won’t. Until companies can tie AI spend to margin at scale, the market will keep testing the boundary between belief and math. It tends to choose math.

Why this matters:

Market leadership this narrow turns idiosyncratic stumbles into system-level drawdowns, forcing de-risking across assets at once.
With data releases delayed and capex surging, narrative fills the gap; companies at extreme multiples now need proof, not promises.

❓ Frequently Asked Questions

Q: How does Palantir's valuation compare to other tech companies?

A: Palantir trades at roughly 250 times forward earnings, making it one of the most expensive large-cap tech stocks. For comparison, Nvidia trades at 29x, Microsoft at 32x, and the S&P 500 average sits at 23x. Even at peak dot-com bubble valuations in 2000, most profitable tech companies didn't reach Palantir's current multiple.

Q: What exactly are companies spending AI capex on?

A: The spending goes primarily to data centers, specialized chips (GPUs from Nvidia), cooling systems, and power infrastructure. Microsoft spent $35 billion in one quarter alone, while Meta plans to spend $70-72 billion in 2025. This covers both building physical facilities and buying the computing hardware needed to train and run AI models.

Q: How does the government shutdown affect Fed decisions?

A: Without official jobs reports, inflation data, and GDP numbers, the Fed must make its December rate decision using outdated information and private sector estimates. This data blackout increases uncertainty and makes policy errors more likely. The Fed typically relies heavily on fresh economic data to guide rate decisions.

Q: Is this selloff similar to the dot-com crash?

A: The valuation levels are comparable—the S&P 500's forward P/E of 23x matches 2000 peaks. But differences exist: today's tech giants generate massive profits, unlike many dot-com era companies. The concentration risk is actually higher now, with seven stocks driving most gains versus broader participation in 2000.

Q: What does Michael Burry's short position actually mean?

A: Burry revealed put options against Palantir and Nvidia, betting their prices will fall. While the exact size wasn't disclosed, Burry rarely publicizes positions without strong conviction. His timing—revealing the shorts one day before Tuesday's selloff—either showed prescience or helped trigger the decline through market psychology.