Wall Street is suddenly sounding the alarm on sky-high valuations as Palantir tumbles

• The stock market tumbled on Tuesday, with a sell-off among AI leaders dragging indexes lower.

• Palantir stock dropped as much as 9% after Q3 earnings failed to generate fresh hype for the AI firm.

• Investors are starting to question the valuations of some tech giants and whether AI ambitions will deliver.

The AI trade is taking a hit on Tuesday.

The sell-off in high-growth tech stocks accelerated late in the session, dragging major indexes lower on fears about valuations touching unsustainable levels.

Concerns about equity valuations intensified on Tuesday after Palantir stock tumbled following its third-quarter earnings report, despite solid results and upbeat guidance. The AI software giant beat estimates for the last three-month period, pulling $1.18 billion in revenue, ahead of the expected $1.09 billion.

But shares were down as much as 9%. Other leaders in the AI trade sold off in tandem, and the tech-heavy Nasdaq 100 was down nearly 2%. The 10-year Treasury yield was down two basis points to trade around 4.08%.

Here’s where major indexes stood around 3:00 p.m. ET on Tuesday:

S&P 500: 6,771.90, down 1.17%

Dow Jones Industrial Average: 47,029.06, down 0.65% (-307.62 points)

Nasdaq Composite: 23,379.36, down 1.91%

Other big tech stocks selling off on Tuesday include:

Doubts are swirling around whether some companies have seen valuations go too far too fast, and whether firms will be able to deliver on their AI ambitions after spending billions on the technology.

Palantir’s forward price-to-earnings ratio hovered around 240x Tuesday morning. That compares to Nvidia, which has a forward price-to-earnings ratio of around 29.

Also weighing on sentiment on Tuesday were comments from top banking executives, who said that the risk of a market correction is rising. Morgan Stanley CEO Ted Pick and Goldman Sachs CEO David Solomon both pointed to risks that the market could see a correction of up to 20%. Pick, however, added that he didn’t see this as a negative event necessarily.

“We should also welcome the possibility that there would be drawdowns, 10 to 15% drawdowns that are not driven by some sort of macro cliff effect,” he said at the Global Financial Leaders Investment Summit in Hong Kong.

Markets have also been uneasy about the return on investment on AI so far, JPMorgan’s Market Intelligence desk wrote in a note on Tuesday. Analyst said that clients have been concerned about narrow market breadth, adding that “there is a global risk off tone.”

The endless hype around the technology itself might also be starting to wane.

“Some are doubting whether AI can possibly live up to the hype in terms of future returns,” David Morrison, a senior market analyst at Trade Nation, wrote in a note about Tuesday’s sell-off.

The AI trade has flashed other warning signs in recent weeks. Shares of Meta and Microsoft tumbled after the firms said they would boost capex spending plans, a sign investors are growing skeptical over the buckets of cash being poured into AI.

Meanwhile, “The Big Short” investor Michael Burry recently revealed a bet against Palantir and Nvidia on Monday, adding to the selling pressure in the tech sector.

It isn’t the first round of volatility for Palantir, which plummeted around 40% from its early-year peak through April amid the broader market selloff. Shares declined another 18% from mid-August through their low in September after the short-seller Andrew Left said he was taking a bet against the company.

This all comes at a time when the market is also waking up to the reality that more rate cuts might not be a sure thing. Jerome Powell said exactly that at the Fed’s October meeting last week, and the outlook has grown muddled, especially as the government shutdown forces markets to operate in a data blackout.

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