LONDON, July 31 (Reuters Breakingviews) - Pity the poor traders: they had to deal with the disappearance of both Meta Platforms’ free cash flow and intelligible guidance from the Federal Reserve on the same day. On Wednesday, the Facebook owner ​tightened its promise to spend gargantuan sums on data centers despite few signs of commensurate payoff, with shares subsequently sinking by ‌about $100 billion. Meanwhile, central bank chief Kevin Warsh’s mystifyingly laconic press conference helped send 30-year Treasury yields to their post-2007 peak. The fault lines on which markets precariously rest are becoming clearer.

A trader who hit the beach last Friday and only came back to their desk a week later might not immediately see the carnage. The Nasdaq ​100 Index (.NDX), opens new tab is roughly back to where they would have left it, thanks partly to bumper quarterly reports from Microsoft (MSFT.O), opens new tab and Amazon.com (AMZN.O), opens new tab. At this ​week's low, though, it had slumped by about 3%, reflecting even bigger moves at the epicenter of the AI ⁠boom. The Philadelphia Semiconductor Index (.SOX), opens new tab, for instance, fell 12% at its worst, while South Korea's Kospi (.KS11), opens new tab sank 16%.

Such swings were enough to claim casualties. ​Hedge fund Situational Awareness, run by ex-OpenAI wunderkind Leopold Aschenbrenner, was forced to sell off its public equity positions in the face of margin calls, ​CNBC reported. The Korean government said that it would crack down harder on high-leverage products that have fed into wild market volatility.

It underscores how concentrated risks have become. More than half, opens new tab of the S&P 500's (.SPX), opens new tab market capitalization is represented by companies driving the AI wave. Korea and Taiwan, central to the tech supply chain, account for 51% of the ​MSCI Emerging Markets index.

This has nurtured a giant trend of buying stocks that are already going up. The MSCI USA Momentum index outperformed broader ​equities to an unprecedented extent between March and June, and has now plummeted just as quickly. Yet a lot of it reflects investors rotating their money within a ‌closed circuit ⁠of hyperscalers, chipmakers and server farmers, which are furiously competing to spend as much as possible in the hopes that all of them will simultaneously make good on the investment.

Investors aren't blind to this risk: the Nasdaq 100 trades at a lower multiple of its constituents’ earnings than it did at the start of the year. It’s just that valuations in the rest of the world and among lower-growth "value" stocks are also flat or lower. Neither benefited ​from the recent outflow from AI themes, ​suggesting that it's most of ⁠the market, not just tech, that has hit a valuation ceiling.

After all, while European stocks look cheaper than U.S. ones, they are expensive relative to their own history, buffeted by geopolitics and still growing earnings more slowly. Traditional ​portfolio hedges like bonds, the dollar and gold aren't doing their job either. Traders may not enjoy stomach-churning ​weeks like this ⁠one. They just don’t have anywhere else exciting to go besides away from their desks.

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