Chips Down, Not Out: Reading Through Last Week’s AI Panic

Last week the market took a breather and pulled back. The S&P 500 dropped about 1.5%, the Nasdaq fell 4.0%, and tech stocks, especially semiconductors, got hit the hardest. One key measure of tech momentum fell about 40% in just 18 days, the worst drop since 1998.

But if you look beyond the headline numbers, the picture looks less scary. Small and mid-cap stocks were roughly flat. Regional banks actually hit new highs. The average stock in the S&P 500 held up well, and so did the Dow. The VIX ticked up but stayed below the 20 level that usually signals real panic. In short, this looks like deleveraging and a healthy rotation.

What sparked the selloff? A Chinese AI company released a new open-source model that performs nearly as well as top U.S. models for a fraction of the cost. This spooked investors and revived memories of an earlier shock, raising fears that expensive, closed AI models could struggle to keep making money.

Why the bigger picture still looks fine? Company earnings are coming in strong. With about 8% of S&P 500 companies having reported, sales are beating estimates by 4% and profits by 16%. Banks posted excellent results. The big tech and cloud companies have very little debt.

Two real risks remain. One is geopolitical: renewed conflict in Iran combined with low U.S. oil reserves. The other is structural: automated, rules-based trading strategies that can amplify sudden price swings across stocks, gold, silver, and Bitcoin.