"It feels like I'm back in 2008": AI trades collectively crash, chip stocks enter bear market, momentum ETF sees biggest drop since the pandemic, buyers are on strike

According to Zhitong Finance APP, Wall Street saw a collective sell-off on Thursday. The sell-off intensified rapidly after the US stock market opened, affecting almost all assets from leading AI chip makers such as Nvidia (NVDA.US) to defensive stocks like Walmart (WMT.US). The Nasdaq 100 Index closed down more than 6%, marking its largest single-day drop since March 2020.

The hardest-hit companies in this sell-off were those at the core of the Artificial Intelligence (AI) boom. For months, concerns about an AI bubble have intermittently emerged; earlier this year, this boom drove stock markets to new highs and also raised fears that it was a bubble destined to burst. The overwhelming victory of the Democratic Party in the Congressional elections may signal a political shift that could slow the industry's rapid growth and affect the hundreds of billions of dollars flowing into its computing equipment.

Policy Expectations Reversed, Triggering Sell-Off as AI Leaders Lead Declines

By the close, the Nasdaq 100 Index had fallen more than 6%, its biggest drop since the COVID-19 pandemic crash in March 2020. Nvidia, the world’s most valuable company, fell more than 9%, its largest drop since January 2025, erasing all its gains for the year. All 30 components of the Dow Jones Industrial Average declined, the S&P 500 Index fell 4.4%, and the closely watched semiconductor index dropped 12%, its worst single-day performance since the pandemic outbreak.

Amid speculation that hedge funds were offloading positions, an ETF betting on the so-called momentum trade had one of its worst single-day performances in over a decade, as investors fled to US Treasuries for safety.

“It feels like 2008 or 2001 again,” said Greg Taylor, Chief Investment Officer at PenderFund Capital Management, referring to the bursting of the internet and real estate bubbles. “The market is too focused on a single theme right now—its unraveling was inevitable. We’ve focused too much on AI, and it has taken up too large a portion of the market.”

This sell-off ended two days of extreme volatility on Wall Street. Previously, due to dissatisfaction with high gasoline prices, AI influence, and the sudden emergence of data centers in places like Texas, voters clearly rejected President Trump and the Republican Party during the midterm elections, giving the Democratic Party an overwhelming victory.

The initial market reaction drove stocks higher on Wednesday. Investors bet that a politically divided Washington would check Trump’s power and accelerate the end of the Iran War, which had reignited inflation and pushed up interest rates. But market mood then reversed as focus shifted to possible cracks in the AI boom, hurting dip buyers.

“They definitely got ahead of themselves,” said Michael O’Rourke, Chief Market Strategist at JonesTrading Institutional Services LLC. “Next year's profit forecasts made these stocks look cheap in terms of P/E. But if this policy change occurs, the environment for data center construction will fundamentally shift. Those forecasts no longer hold.”

Nasdaq Pulls Back, Momentum Trading Backfires

The Nasdaq 100 Index slipped further into correction territory, wiping out $2.3 trillion in market value and falling nearly 15% from its October 6th record high.

Traders are now paying more for short-term volatility protection on the Invesco QQQ Trust Series 1 Exchange Traded Fund (QQQ) compared to the cost of three-month forward volatility protection on the SPDR S&P 500 ETF Trust (SPY) for the first time since the end of July, signaling uncertainty about the market’s direction.

“As someone who generally welcomes sell-offs, I’m actually becoming more cautious now,” said Marta Norton, Chief Investment Strategist at Empower. She said she only invests in “companies with very healthy operations that look cheap by traditional metrics.”

The swift reversal in sentiment hit an ETF that employs a momentum trading strategy, which aims to chase top-performing stocks in the market. On days like Thursday, this strategy can incur heavy losses: the iShares MSCI USA Momentum Factor ETF fell 8.2%, marking its largest single-day drop since 2020.

Michael Monaghan, Partner and Portfolio Manager at Founder ETFs, said many smaller hedge funds use similar strategies, which amplify selling pressure as they are forced to close positions, while other buyers are reluctant to step in.

He said: “What we’re facing now is a buyer strike—the large long-only funds who had been tentatively buying are no longer stepping in, while the smaller funds are frantically dumping their positions.”

Chip Stocks Enter Bear Market, Risk Assets Suffer

On Thursday, the Philadelphia Semiconductor Index (SOX) plunged 12%, its worst single-day performance since March 2020. This pushed the benchmark index into bear market territory, down more than 38% from the June 22 peak. The index includes leading chip makers like Nvidia, Intel (INTC.US), and Advanced Micro Devices (AMD.US). These companies have benefited from the AI device spending boom, but given their high valuations, they are also among the most susceptible to a potential correction.

The CBOE Volatility Index (VIX) soared 11.57 points to close at 28.18, the highest level since March. The VIX measures the implied price volatility of the S&P 500 Index. The expected volatility indicator for the VIX posted its largest one-day jump since 2018. In 2018, a wave of speculative funds poured into short-VIX products, triggering a volatility spike known as “Volmageddon.” Additionally, the gap between spot prices and three-month futures widened to its largest since April 2025. This typically indicates rising investor fear and signals deeper potential declines.

This latest decline has increased the pressure on stocks seen as carrying the highest market risk. Goldman Sachs’ basket of most-shorted stocks dropped nearly 8%. Meanwhile, a group of unprofitable tech companies—including Roku (ROKU.US) and Peloton Interactive (PTON.US)—fell 7.7%, their largest single-day drop since early June.

Additionally, companies with the weakest balance sheets and higher debt loads slumped about 4%, their worst day since April 2025. The Russell 2000 Index dropped about 4.5%, entering correction territory. The index includes smaller firms more sensitive to higher interest costs.

The Wealth Alliance, which had previously reduced exposure to AI stocks, said its President and Managing Director Eric Diton believes resistance to data centers could impact profits. He stated that, given the abrupt shift in market sentiment, he remains cautious and has been buying energy stocks to hedge against high oil prices.

“This sell-off is extreme,” he said, adding that he “can’t be as optimistic about the market as I was a few days ago.”