The past week ended in the worst possible way. On Friday, the Nasdaq fell 2.86%, its worst single-day performance since June 5. And fear finally came out into the open.
But the market didn't start falling on Friday. It had been declining for weeks, and for reasons that go much deeper than one bad trading session. Then, on Thursday night, came the biggest theft in crypto history, involving Binance.
"So, was it the hack that caused all this?" you might be wondering. No. And today we're going to look at why. Behind all the red numbers are three much more serious issues: AI, the FED, and growing investor nervousness.
A FRIDAY IN THE RED
Let's start with the closing numbers. The Nasdaq finished at 25,437 points, down 2.86%. The S&P 500 fell 1.82% to 7,580, while the Dow Jones dropped 1.09% to 51,770. The Nasdaq is now almost 7.8% below the record high it reached on October 6.
And what about chip stocks? Even worse. The semiconductor index lost 7.2% in a single day. AMD fell 10.9%. Over the course of October, the sector has lost more than 15%. The Nasdaq as a whole ended the month down more than 5%, its worst month since March 2025.
Here's where things get even more interesting. There is a version of the S&P 500 in which every company carries equal weight, regardless of whether it's a giant corporation or a much smaller business. That index fell just 0.79%.
What does that tell us? The biggest damage was concentrated among the technology giants. The technology sector dropped 4.89%. Meanwhile, gains came primarily from energy, consumer staples, utilities, and healthcare. The traditional defensive sectors. These are the areas where money tends to flow when investors get nervous.
And the fear is visible everywhere. The VIX, Wall Street's so-called "fear index," jumped 12.9%. CNN's Fear & Greed Index, which measures investor sentiment, is sitting in fear territory. During October, it even entered extreme fear.
And what about the big hedge funds? According to Morgan Stanley data, they have reduced their equity exposure by 7.8% from its recent peak. That's the biggest reduction of its kind since 2016.
You might be wondering whether disappointing earnings are to blame. Not exactly. According to FactSet, 82% of S&P 500 companies that have reported earnings have beaten expectations. But the average beat is just 1.9%, compared with the five-year average of 7.5%.
In other words, companies are beating expectations, but only just. And in a market that's already nervous, that isn't enough.
SHOW ME THE MONEY
And this brings us to the heart of the problem: AI.
Alphabet, Amazon, Meta, and Microsoft are planning to spend more than $740 billion on investments this year. And the market's question has changed. It's no longer asking, "How much are you going to invest in AI?" It's asking, "When are you going to get that money back?"
Just look at their cash flows.
Alphabet reported negative free cash flow of $9.1 billion for the quarter, marking its second consecutive quarter in negative territory. Amazon recorded negative free cash flow of $42.4 billion over the trailing twelve months. Meta reported negative $2.1 billion.
The only exception is Microsoft, with positive free cash flow of $18.6 billion.
In other words, they're spending more than they're bringing in. And where does the rest of the money come from? Borrowing.
Together with Oracle, these five companies have borrowed $326 billion this year. That's three times as much as last year.
And the market is punishing even companies that deliver strong numbers. Yes, you read that correctly.
Alphabet's cloud business grew 103%. Yet its stock fell 12% on Thursday, its worst single-day performance in history, wiping out $500 billion in market value.
Amazon's AWS grew 39%. Its stock fell 7%.
Meta's advertising revenue increased 26%. Its stock dropped 10% over the previous week.
And companies that disappoint? They get crushed.
Intel fell 28.6% on Friday, its worst single-day performance since 1974. The reason? For the fourth quarter, the company expects revenue of $15–16 billion, while the market was expecting approximately $17 billion.
As Oliver Pursche of Wealthspire Advisors put it, companies that fall short of expectations "are getting punished."
Of course, there's another side to this story. The market has already started reassessing how much it's willing to pay for AI.
A year ago, the Nasdaq 100 was trading at 28.7 times its forward earnings. Today, that multiple stands at 21.2.
And according to Morgan Stanley, approximately 60% of Russell 3000 stocks are now more than 20% below their June levels.
In other words, the correction isn't something that's coming. It's already happening.
And why does this matter so much? According to Goldman Sachs, AI investments account for almost half of the earnings growth expected from the S&P 500 this year.
So when AI starts showing cracks, the entire market feels the impact.
THE FED AND THE WEIGHT OF INTEREST RATES
But there's another factor at play: the FED.
On Wednesday, it kept interest rates unchanged at 3.75%–4.00%. However, the decision wasn't unanimous. The vote was 10–2, with Lisa Cook and Beth Hammack voting against the decision because they favored a rate increase.
The following day, the PCE inflation reading came in at 3.6%, up from 3.4%.
The market is now assigning roughly a 70% probability to an interest rate hike at the December 8–9 meeting.
And what about the yield on the US 10-year Treasury? It reached 5.31% on October 5. It's now at 4.94%, but it remains elevated.
"So, what does this have to do with technology stocks?"
Quite a lot.
Put simply, when interest rates are high, the profits we expect companies to generate in the future are worth less today. And growth companies are precisely the ones whose valuations depend heavily on those future earnings.
At the same time, borrowing becomes more expensive. That includes the very borrowing being used to finance data centers.
Florian Ielpo of Lombard Odier put it very nicely. The issue isn't so much that stocks have become expensive. It's that bonds have become attractive.
And there's one more thing worth mentioning. The US midterm elections are taking place on Tuesday.
As Tom Lee of Fundstrat put it: "Our institutional investors just don't have conviction until after midterm."
In other words, major investors are waiting for the election results before making their next move.
AND AS IF THAT WEREN'T ENOUGH... BINANCE
Now let's get to the hack.
On Thursday, approximately $6.3 billion was stolen from Binance. The biggest theft ever recorded in the crypto industry.
Bitcoin fell below $77,000.
On Friday, crypto-related stocks such as Coinbase, Strategy, and Robinhood lost between 7.2% and 10.6%.
Binance has said it will cover the losses using its own funds, and withdrawals are gradually reopening today.
"But wasn't this what brought the markets down?"
No.
The Nasdaq had already been falling since October 6. That's three weeks before the hack.
And according to Reuters' coverage of Friday's market sell-off, the decline was driven by Amazon and Intel's earnings, along with concerns over the enormous sums being spent on AI.
The Binance incident was simply another ugly headline in a market that was already fearful.
So, what's the bottom line?
This correction wasn't triggered by a single isolated incident. It's being driven by macroeconomic data and growing investor concerns about valuations.