Technology and semiconductor stocks took a sharp hit on Tuesday, dragging down the Nasdaq and S&P 500, while the Dow Jones Industrial Average managed to eke out a slight gain. The selloff was driven by a reassessment of valuations in the artificial intelligence sector and renewed concerns about potential Federal Reserve interest rate hikes.
Market Performance
The Dow Jones Industrial Average inched up 0.02% to 51,720.88, barely staying in positive territory. In contrast, the Nasdaq Composite dropped 1.42% to 25,795.92, and the S&P 500 slipped 0.94% to 7,402.42, according to LSEG data. The U.S. 10-year Treasury yield held near 4.489%, while Brent crude oil prices eased by roughly $1 to $76.72 a barrel.
Chip and AI Stocks Lead the Decline
Chip and AI-linked stocks plunged, with Nvidia falling about 3% and the Philadelphia SE Semiconductor Index tumbling 7.3%. Other major chipmakers also suffered significant losses: Intel dropped 6.2%, Marvell Technology fell 8.7%, and AMD declined 6.8%. Nigel Green, CEO of deVere Group, commented that the AI trade has become crowded, warning that "the exit door becomes very small very quickly."
The selloff in AI stocks is particularly concerning for Wall Street, as these names have driven much of the market's gains this year. A simultaneous decline in these high-growth stocks can offset gains in cheaper or defensive sectors.
Investor Concerns Over AI Spending
Investors are increasingly questioning the heavy capital expenditures on AI infrastructure, including data centers and chips. Goldman Sachs strategist Rich Privorotsky noted that the market had been "ignoring almost every negative development" in the AI capex trade over the past few weeks. Swissquote Bank analyst Ipek Ozkardeskaya added that SpaceX's decision to sell bonds has renewed jitters about large tech companies relying on debt to fund AI buildouts.
Federal Reserve and Inflation in Focus
The Federal Reserve remains a key concern for markets. Last week, the Fed kept its rate target at 3.50%-3.75%, but nine out of 19 policymakers see a rate hike by the end of 2026. Higher rates typically weigh on growth stocks by reducing the present value of future profits. Thursday's release of the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, is highly anticipated. The April PCE report showed a 3.8% year-over-year increase, and the next update is due June 25.
Market Support Remains
Despite the selloff, some analysts see support under the market. Barclays and Stifel both raised their year-end S&P 500 targets to 7,800. Barclays analysts led by Venu Krishna wrote that "the equity bull case remains intact," though they cautioned that earnings and AI capex visibility need to improve as Fed support wanes.
Oil and Geopolitical Factors
Oil prices eased as traders monitored crude traffic through the Strait of Hormuz, following some signals of progress in U.S.-Iran talks. However, PVM Oil Associates analyst Tamas Varga noted that ship owners want "assurances" that mines are cleared before shipping returns to normal.
Outlook
The risk now is that the selloff could broaden beyond expensive AI stocks and start to affect earnings quality. A stronger-than-expected inflation number, talk of more Fed hikes, or new doubts about whether AI spending is driving revenue could trigger further outflows from semiconductors and big tech. Even if oil prices fall and the Dow, with fewer tech names, continues to hold up, the broader market may remain under pressure.
