Nasdaq plunged 5% in a single day! The most drastic volatility since April—what's happening with U.S. stocks?

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The U.S. stock market experienced its most dramatic intraday reversal since April on Thursday, with major indexes falling to their lowest levels in more than two months. Despite strong earnings reports from Nvidia and Walmart, which pushed the market higher in early trading, a sudden wave of selling wiped out all gains and left Wall Street traders baffled about the real cause behind the rout.

Overnight, the Nasdaq 100 Index plunged nearly 5% from its intraday high and ultimately closed down 2.4%, expanding its pullback from the October 29 record high to 7.9%.

The S&P 500 Index rose 1.9% in early trading, but then erased all gains and closed down 1.6%, with over $2.7 trillion in market value evaporating. Notably, the S&P 500 has fallen more than 5% from its record high in October and, for the first time since February, closed below its 100-day moving average, hitting its lowest level since September 11.

The VIX index, which measures expected stock market volatility, closed above 26 for the first time since April.

Nvidia became the biggest drag on the Nasdaq 100, sliding 3.2% after an early gain of 2.4%, wiping out nearly $400 billion in market value from its intraday high. Investors rekindled concerns about the sustainability of AI chip spending, overlooking the company’s revenue outlook, which exceeded expectations.

As for the reasons behind the plunge, some traders pointed to renewed doubts over whether AI can generate enough revenue or profits to justify massive investment. Others believe the strong September non-farm report is the latest sign the Fed has ended this year’s rate cut cycle. Still others said risk-off signals from Bitcoin hitting a six-month low partly explained the stock selloff. Additionally, there are concerns about high valuations and heightened volatility ahead of Friday’s options expiry.

Multiple Negative Factors Overlap

Traders have raised various explanations for this plunge.

Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Company, said,

Nvidia’s results need to be viewed against the backdrop of many unresolved questions: from a strong labor market, tariffs, inflation, and the Fed’s future actions, to AI sustainability, stock valuations, concerns around private credit, declining unprofitable tech stocks, and cryptocurrencies. In short, investors are debating many unanswered economic and market questions.

The revised strong jobs data for September led some traders to believe this is the latest sign the Fed has ended its rate cuts for the year. Bitcoin’s fall to a six-month low was also seen as a sign of falling risk appetite. Frank Monkam, Head of Cross-Asset Macro Strategy and Trading at Buffalo Bayou Commodities, said,

With crypto entering bear market territory, cross-asset deleveraging cascades haven’t ended. Crypto is dominated by retail, and retail has led the market higher since spring—the fragility is obvious.

From a technical perspective, Goldman Sachs also noted that systematic trading strategies (CTA) are accelerating selling. These strategies previously held extremely high long positions, have now breached short-term thresholds, and are approaching the medium-term threshold at 6,456 points. Breaching or falling below this level could trigger even larger systematic selloffs. On the other hand, liquidity is a concern, with data showing S&P 500 top-of-book liquidity at only about $5 million, far below the year-to-date average of around $11 million.

Valuation Concerns Overshadow Earnings Surprises

Sameer Samana, Head of Global Equities and Real Assets at Wells Fargo Investment Institute, said,

While Nvidia’s results are positive, they’re not enough to dispel doubts about whether valuations are too high, and whether the recent shift to debt financing means investment levels are too aggressive and not focused enough on shareholder returns.

Goldman Sachs partner John Flood said this sharp reversal highlights how, although Nvidia beat expectations, it failed to “clear the risk trigger” as traders had hoped, and instead prompted them to seek hedges against further losses. The market is currently battered, with investors excessively focused on hedging crowded market risks, entirely in profit/loss protection mode.

Matt Maley, Chief Market Strategist at Miller Tabak + Co., pointed to the core issue: “Can AI actually be as profitable as the market has priced in? That’s the key question. Traders are worried about whether today’s AI investments will be profitable five years from now. So people are starting to say ‘I need to cut back.’”

Craig Johnson, Chief Market Technician at Piper Sandler, said, “Investors breathed a sigh of relief after Nvidia’s earnings. However, market breadth needs more time to stabilize and begin to recover.”

High-Risk Assets Hit Hard

Thursday’s selloff was even more pronounced in the riskiest areas of the stock market. The most-shorted stocks index fell 3.5%, and Goldman Sachs’s unprofitable tech index dropped 3.7%. The Russell Microcap Index fell 1.9%, taking its pullback from the record high to 10%. Market capitalizations for Tesla, Alphabet, Apple, Microsoft, Broadcom, and Amazon each fluctuated by more than $100 billion.

The Nasdaq 100 volatility index VXN rose above 32 for the first time since April. This turbulence comes ahead of Friday’s $3.1 trillion notional value options expiration, including $1.7 trillion in S&P 500 contracts and $725 billion in single-stock options.

Scott Rubner, Head of Equities and Equity Derivatives Strategy at Citadel Securities, said, “These mechanical outflows may remain strong over the next few days and then fade completely.”

Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, noted, “With Nvidia’s earnings out of the way and the Fed unlikely to cut rates in December, investors are starting to question what can drive a year-end rally. CTA (commodity trading advisor) positions remain fragile; systematic strategies are still slightly net long, but a deeper pullback may force further selling.”

Risk Warnings and DisclaimerThe market has risks; investment must be cautious. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial status or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing based on this carries your own risk. ```