AI Momentum Trade Cracks as Nvidia and Peers Plummet

The tech sector's 'buy anything' phase is coming to an end as the market's momentum trade cracks. Nvidia, once the poster child of the AI boom, fell 4.6% on Friday, erasing nearly all of August's gains. Marvell, a key supplier of AI data-center chips, plunged 10.3%, and PayPal, riding the digital-payments wave, collapsed 12.7%. The trio's divergence shows that earnings must now justify prices.

The Fed's firmer tone is exposing vulnerabilities in the AI-driven rally that defined 2026. Traders had bet on a December rate cut to support lofty valuations, but then-Fed Chair Kevin Warsh called inflation 'unacceptably high' at Jackson Hole, leaving the door open to further increases. Markets now see a 38% chance of a September hike, up from just 10% in July.

The unraveling of the momentum trade is also adding to the strain. The 'Magnificent Seven', which includes Nvidia and Microsoft, make up 32% of the S&P 500's market cap, per Goldman Sachs. This extreme concentration has created a crowded exit, with investors asking themselves what they're actually holding.