AI Selloff Triggers Contagion, Bitcoin Bear Market

Major US indices declined on Tuesday, 4 November, following warnings from Morgan Stanley (MS) and Goldman Sachs (GS) executives about unsustainable AI stock valuations. The S&P500 (ES) lost 1.17%, the Dow Jones (YM) fell 0.53%, and the Nasdaq (NQ) plummeted 2.04% as Fed officials offered a mixed view on interest rate cuts. Palantir (PLTR) crashed 10%, Nvidia (NVDA) declined 2.7%, and Tesla (TSLA) tumbled 4.2%.

On Wednesday, 5 November, Asian markets experienced a contagion effect, witnessing their steepest declines since “Liberation Day”. The Nikkei (NIY) plunged 7% from record highs, Japan’s SoftBank (9984.TY) crashed 14.3% as a major investor in AI, but China’s CSI 300 rose after China said it would reduce tariffs on US goods to 10% from 24%. Bitcoin (BTCUSD) was also impacted by the selloff, trading below the $100,000 mark for the first time since June and officially entering bear territory. (Source: Reuters)

TL;DR

• Morgan Stanley and Goldman Sachs CEOs warned of a 10-20% market correction within 12-24 months, citing stretched valuations in AI stocks.​

• US equity indices experienced steep losses, with the S&P 500 down 1.17%, the Nasdaq down 2.04%, and technology stocks leading losses.​

• Bitcoin entered a bear market, experiencing a decline of over 20% from its October peaks, and broke below $100,000 for the first time since June.​

• Asian markets fell sharply on November 5, with Japan's Nikkei down 7% and SoftBank extending its decline by over 14%.​

• Palantir collapsed 10% despite beating quarterly earnings, highlighting investor concerns that AI company valuations cannot be justified.​

• Crypto liquidations are estimated at nearly $30 billion as risk-off sentiment swept across financial markets.​

AI Bubble Evolves?

David Solomon, CEO of Goldman Sachs, said during a financial leaders summit in Hong Kong that "It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months," adding that AI valuations have become stretched. Ted Pick, CEO of Morgan Stanley, echoed this pessimism, saying he would welcome "10 to 15% drawdowns that are not driven by some sort of macro cliff effect," suggesting expected corrections without major economic disruptions. Combined with concerns about the sustainability of AI-driven gains, as expressed by Fed Chair Jerome Powell, BOE Governor Andrew Bailey, and the IMF amid the ongoing US government shutdown, Wall Street executives triggered a selloff across technology stocks that had been driving the broader market rally.

The drop intensified after Palantir, which has already surged more than 160% year-to-date (YTD), crashed despite reporting upbeat Q3 earnings and guidance. The stock's valuation now exceeds 200 times its projected earnings (forward P/E), with analysts questioning whether its strong earnings growth can justify such a multiple. “Big Short” legend Michael Burry disclosed a short position on PLTR ahead of the stock’s drop as policy tailwinds persist. Still, retail investors seem undeterred as the US government keeps increasing the budget for AI and defence. But it isn’t just Palantir. JP Morgan (JPM) analysis showed that “AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since ChatGPT launched in November 2022.” (Source: NBCNews)

Market Spillover Intensifies in Asia

Tuesday’s declines on Wall Street accelerated dramatically across Asia on Wednesday, as regional stock exchanges opened to a wave of risk-off selling. SoftBank, as a significant technology and energy conglomerate with substantial AI investments, plunged as much as 14% as investors reassessed the company's AI bets. Tokyo Electron fell 4.1%, while in Seoul, Samsung Electronics lost 7.8% and SK Hynix nearly 10%, as warnings drew comparisons to the dot-com bubble. 

Meanwhile, the Chinese State Council announced on Wednesday that it would suspend tariffs on US goods for a year and keep a 15% duty after US President Donald Trump and counterpart Xi Jinping met last week on the sidelines of the APEC meeting. The tariff suspension and reduction will take effect on November 10, according to Customs Tariff Commission Announcement No. 2 of 2025. Chinese stocks were seen rising instead, despite an earlier dip due to poor service PMI figures. (Source: Reuters)

Bitcoin Caught in Risk-Off Rout

The decline also spilt over to cryptocurrencies, with estimates calling for a $30 billion liquidity hole. Bitcoin dropped 5% on Tuesday, but trouble has been knocking on the door for weeks after BTC reached an all-time high and, importantly, failed to gain in October. The month is known as “Uptober” for its substantial gains in the month, though this time around, the cryptocurrency was unable to produce any gains and instead suffered its first red October in seven years. Bitcoin even dropped under the $100,000 psychological mark on Tuesday, officially entering bear market territory as its losses from record peaks extended to over 20%. Ethereum (ETHUSD) also lost some 9% near the $3,000 round support.

The drop in Bitcoin took the cryptocurrency below its 200-day moving average, near $110,000. Some analysts viewed a more hawkish Fed under Powell, along with on-chain data, as bearish, eyeing $92,000 and lower levels. However, triple digits hold significant importance to the cryptocurrency’s outlook. Notably, following the last red October in 2018, Bitcoin fell an additional 37% in November, which would bring prices closer to erasing the rally of the past six months. (Source: Finance Magnates)

*Past performance does not guarantee future returns. The above are only projections and should not be taken as investment advice.