Sensex, Nifty see sudden spike in volatility as US stocks crumble on AI valuation concerns

The overnight volatility in the US market spilled onto the Indian bourses on Friday with the latter snapping two-day winning streak in early deals.  Earlier, Indian stocks were set to extend gains for the third straight session on Friday, indicated Nifty futures, which rose 164 points to 26,234.

However, the weakness in Asian stock markets, which emanated from the overnight debacle on US bourses cast a spillover effect on their Indian peers.

The US market was hit by fears of a growing bubble around the artificial intelligence frenzy in less than 24 hours after strong results from chipmaker Nvidia sparked a rally.

Shares of Nvidia have led to an astronomical surge in the valuations of AI-related firms in recent months.

Fears of a bubble in AI related tech stocks have mounted in the US as firms spend on chips and data centrEs in a bid to get a foothold in AI.

Meawhile, the India VIX, Indian market's volatlity index, surged 14% to 13.85 against its previous close of 12.14.

VK Vijayakumar, Chief Investment Strategist, Geojit Investments said, "Market volatility has spiked up. Nasdaq, the barometer of the AI trade, closed down 2.15% yesterday crashing 4.4% from the intraday peak. This kind of market movement is a signal of more volatility in store. While there are valuation concerns in AI stocks with many experts warning of a bubble burst, the Nvidia CEO disagreed with this cautionary warning with the statement. At lower valuations, fresh buying may again emerge in AI stocks. We will have to wait and see how this volatile phase unfolds."

Referring to the impact of AI trades on Indian market, Vijaykumar said, "Since India has been an under-performer in this year’s  AI trade, it will benefit if the AI trade fades and money starts flowing into non-AI stocks in countries like India. But a big crash would impact all markets. So wait and watch how things unfold."

In early deals today, Sensex was down 334 points at 85,297 while NSE Nifty50 fell 102 points to 26,090.

Overnight, the Dow Jones Industrial Average ended 386.51 points, or 0.84% lower 45,752.26. The S&P 500 declined 1.56% to finish at 6,538.76, and Nasdaq Composite slipped 2.16% to 22,078.05.

The fall in the US market came after an early rally in Nvidia post its earnings faded. Nvidia stock, which rose 5% in early trade, ended 3.15% lower at $180.64. The much-awaited US jobs data failed to provide clarity on the near-term path for interest rates in the world's largest economy.

In Asia, Japan's Nikkei crashed 1150 pts to  48,673 and Taiwan Weighted fell 773 pts to 26,653.