Morgan Stanley Sees Chinese Stocks Falling Up to 15% More After an AI Crash Erased $480 Billion in Under 4 Months

The Chinese AI crash has begun, and Morgan Stanley is stepping in to say the carnage is not over. I'm Eric Bleeker with 247 Wall Street and we're looking at why China's AI crash began and why the pain may be far from its ending point.

China's AI crash wiped out about $480 billion in market value across the past four months from Shanghai Star 50.

Over the summer investors in China piled in, but as global rotation of AI and wrist stocks began the summer, the crash began. Morgan Stanley sees another 10% to 15% drop before the bottom.

So how do we get here? Fund manager Doug Bowsen summed it all up in one line. He said, quote, the stock market later evolved into a speculative crazy bowl and now we see the bubble bursting, and quote.

The damage is everywhere across China. Reuters says humanoid robot maker Unitry has lost about half its value since its August debut. That's the IPO that was oversubscribed in some reports by more than 8,000 times yet today.

Anyone who bought it and held is deeply underwater. GPU makers Meta X and more threads seen as China's answer to Nvidia have roughly halved since July and optical suppliers in the country such as Yato Link trade about 60% below their summer highs.

Beijing seemed to see it coming. State-backed investors sold into rallies during the runup, cashing out while prices were still climbing.

So why could one theme take down a whole market? The answer is simply size. Goldman Sachs estimates AI stocks make up 42% of China's market value and 57% of its trading. When one idea gets that big, its reversal drags everything down with it.

And valuations make the fall worse. Trending topics notes the star 50s price to earnings ratio once stood near 250X. Even after the crash training topic says it still sits around 100, very comparable to Nasdaq bubble levels from 2000. Meanwhile, the Nasdaq in America trades for about 30 times trailing earnings.

American investors did feel this directly. The Crane shares China Technology and Semiconductor Star 50 index, which is Ticker KSTR is the main way US investors own the index. It trades at around $17.75. That's down 45% since the June 30 close, and it's once again dropping today, Thursday, October 29th in pre-market trading.

The big names in China are falling as well. Alibaba is down 32% year to date, Baidu is down 40%. On paper, their AI businesses are growing fast and Alibaba's lace quarter AI cloud revenues grew 45% and CAPEX, the money it spends on infrastructure jumped 75% to 10 billion. Baidu's GPU cloud revenues rose 283%, but it has a big problem. It's online marketing revenue fell 19%.

Analysts have cut their 2026 earnings estimates for Baidu 18 times in the past 30 days with zero increases, not a good sign.

In the US, Nvidia forecast uh for third quarter revenue stands at $108 billion, and that outlook assumes no China data center revenue at all. CEO Jensen Wong put on the company's August call, AI has reached its inflection point. It's doing useful work. AMD expects about 13 billion in third quarter revenue and the stock is up about 163% year to date.

So the big question is, should US investors worry? Well, I would use China as a checklist. Warning sign one is extreme valuation. The Nasdaq 100 trades far below the Star 50's multiple. Whenever an index starts trading for something like 250X, that is a blaring red warning sign to avoid it as a correction is inbound.

The next warning sign is crowded trading. Keep an eye on how chip leaders handle down days. Nvidia is down about 6% across the past month and AMD off 7%, even though Nvidia says its demand continues to run well ahead of supply.

While AI carries incredible promise at the top in early summer, it also became far too crowded with both retail investors and major institutions piling in. Yet, at today's level, should be noted, high profile companies like Nvidia trade at some of their lowest forward PEs on record. So there's opportunity.

But what you need to do is manage that opportunity against your exposure to a single trend. Keep it manageable because as we've seen across 2026, the market sentiment on AI, it can shift quickly.

I'm Eric Bleeker with 24/7 Wall Street for all the biggest stories in the stock market. Make sure to follow along with 24/7 as a trusted sources we will be covering the rest of market activity through heated midterms and the remainder of 2026.