Why The Nasdaq Just Hit Correction Territory

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**Ed Elson** (1:54)
Welcome to Prof G Markets, I'm Ed Elson, it is July 29th. Let's check in on yesterday's market vitals.
The S&P 500 and the Dow rose, meanwhile the NASDAQ declined as chip stocks got crushed. More on that in a moment. Brent Crude declined to about $84 per barrel. The yield on 10-year treasuries fell ahead of the Federal Reserve's interest rate decision due later today. And finally, SpaceX shares fell to a new low of $107 per share, down 52% from their all-time high.
Okay, what else is happening? The most important sector in the stock market is starting to fall apart. The tech-heavy NASDAQ 100 fell for a fifth straight day, briefly entering correction territory, meaning it fell 10% from its highs. Chip companies led the decline. The PHLX Semiconductor Index sank as much as 6% and Micron fell 9%.
But the sell-off started overnight in Asia, where SK Hynex dropped nearly 15% and the Cosby Index fell 11%. This drawdown raises a major red flag in the first half of this year. Nine of the 12 biggest contributors to the S&P 500's return were semiconductor stocks. So investors are left wondering, where can this market go without chip stocks? Here to discuss this, we're speaking with Torsten Sløk, Chief Economist at Apollo Global Management. Torsten, great to see you again. Thank you for joining us. You said a striking quote recently on our friend Steve Eisen's podcast. You said, quote, this AI thing better work out, because if it doesn't work out, your portfolio will be in trouble.
Is this a sign that AI might not be working out?

**Torsten Sløk** (3:49)
The challenge at the moment is that the hyperscalers and those who are building the infrastructure, they are changing their financing, which used to be mainly from the equity side of the balance sheet to now being on the debt side of the balance sheet.
And the amount of debt that has come to the market from the hyperscalers, meaning the companies that are building out the infrastructure, has just been enormous.
So as a result, we've seen very, very significant increase in supplier of investment grade credit that is in the hyperscaler space. And the consequence of that is that we have started to see spreads in credit widen out on that hyperscaler debt. And this has resulted, of course, in a number of questions being asked, namely, are spreads widening out on hyperscaler debt because of worries about the underlying credit of these companies, meaning their ability to pay back their debt? Or is it simply just because of demand and supply that there's just more supply at the moment and now there's just not so much demand? And as a result, spreads have been widening out. The other development more recently to your question, Ed, is also the CDS spreads, meaning the cost of insuring yourself against these companies going under in the next five years. Those CDS spreads have also widened out quite significantly. So one way of answering your question is that there's simply so much debt that has come to the market, and the market has now begun to ask some questions around, well, if these companies need all this financing, what is the right interest rate? What is the only level of yield that is required to finance the build out, the way that we're seeing at the moment? And that is really the starting point for how the domino bricks are toppling here, namely that spreads have widened out. And as a result, the equity in these companies, the stock price of these companies have also started to underperform. And that is where we are today, namely this discussion around what is the speed of the AI build out, what is the payoff from the AI build out. And all those questions, of course, are very important when we think about the stock price, especially for the hyperscalers and more broadly, the Magnificent 7