Why Thursday's Nvidia Earnings-Led Stock Market Early Rally Turned Into a Rout

Many investors in Nvidia (NASDAQ: NVDA) stock and other artificial intelligence (AI) stocks probably went to bed on Wednesday night believing that Thursday would be a good day for their stock. Indeed, many investors likely thought the same about the entire stock market.

That's because AI tech leader Nvidia (NASDAQ: NVDA) turned in a phenomenal third-quarter report on Wednesday after the market close. Not surprisingly, investors bid the stock up by about 5.1% in Wednesday's after-hours trading.

Nvidia's quarterly results often impact other AI stocks as well. The company is considered a bellwether, or an indicator, of the AI market, because it's the largest AI company by market capitalization. Its immense size stems mainly from its sales of graphics processing units (GPUs) and related tech that enable AI in data centers. Demand for its industry-leading GPUs has been voracious.

Moreover, Nvidia is the most valuable company on the S&P 500 index, which is why it's often considered a bellwether for the entire U.S. stock market as well.

Image source: Getty Images.

Thursday's early market rally turned into a rout

Following Nvidia's stellar report, it was no surprise that its shares and the market in general opened higher on Thursday morning.

Nvidia shares were up 5.1% at the start of Thursday's regular trading session at 9:30 a.m. ET. The S&P 500 index and the tech-heavy Nasdaq Composite index opened higher by 1.4% and 2.2%, respectively, on Thursday.

It was looking like it was going to be a good market day. But the market's sea of green early Thursday quickly evaporated, and by the afternoon, the major stock indexes, Nvidia stock, and many other stocks were in the red.

Data by YCharts.

Nvidia stock ended Thursday's regular trading session (which ends at 4:30 p.m.) down 3.2% from Wednesday's close, and down 7.8% from its opening price on Thursday.

The S&P 500 and Nasdaq closed lower by about 1.6% and 2.2%, respectively, on Thursday.

What spooked the market on Thursday?

There were likely two main things that spooked the market on Thursday. The first -- and perhaps the most significant -- was increasing concern among investors that the Federal Reserve would not cut interest rates in December. This rising concern was sparked by the release on Thursday morning of delayed September jobs reports, which gave a mixed picture of the U.S. labor market.

The second factor that probably weighed on investors was continued concerns that AI stocks are in a bubble. Nvidia's Q3 report went a long way in calming these jitters, but it probably did not entirely extinguish them.

Fears of an AI bubble were sparked mainly by the Nov. 4 revelation that hedge fund manager Michael Burry took bearish positions on AI stock darlings Nvidia and Palantir in the third quarter.

I won't speak to all AI stocks, as I don't think lumping such a diverse group together is fair, but I do not believe Nvidia stock is in a bubble.

Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.