U.S. stocks suffered their worst session of the year on Friday, with the Nasdaq Composite tumbling 4.18% as a robust May jobs report reignited fears of tighter monetary policy. The sell-off wiped out $1.3 trillion in market value from semiconductor companies, breaking the S&P 500's nine-week winning streak and sending shockwaves through the broader market.
The S&P 500 fell 2.64%, while the Dow Jones Industrial Average dropped 695 points, or 1.35%. The rout was led by technology and chip stocks, which had been the primary drivers of this year's rally. The PHLX Semiconductor Index plunged 10.3%, its steepest single-day decline since March 2020.
Jobs Data Sparks Rate Hike Bets
The catalyst was the Labor Department's May employment report, which showed the U.S. economy added 172,000 jobs, exceeding expectations. The unemployment rate held steady at 4.3%, while average hourly earnings rose 0.3% month-over-month and 3.4% year-over-year. The data dashed hopes for an imminent easing cycle, with traders now pricing in a 43% chance of a rate hike by December, up from 26% last month, according to CME FedWatch data.
"In the near term, the data confirms that Fed easing is off the table this year," said James McCann, senior economist at Edward Jones. The 10-year Treasury yield climbed to 4.54%, while the two-year yield, more sensitive to Fed policy expectations, rose to 4.16%. Higher yields typically weigh on growth stocks, as they reduce the present value of future earnings.
Chip Stocks Bear the Brunt
Semiconductor stocks were hammered, with Nvidia falling 6%, Micron dropping 13%, and Advanced Micro Devices losing nearly 11%. Broadcom slid 7.9%, extending its two-day decline to nearly 20% after its quarterly results and outlook failed to meet lofty expectations for custom AI chips. "Very high expectations meeting a market that wanted perfection," said Matt Britzman, senior equity analyst at Hargreaves Lansdown.
Despite the rout, some strategists remain optimistic. Ohsung Kwon, chief equity strategist at Wells Fargo, told Reuters that while the semiconductor sector was "way overbought," the bull market in chips is not over. Warren Pies, co-founder of 3Fourteen Research, added that equity markets do not exhibit bubble-like characteristics, saying "the metrics don't back it up."
Broader Market Fallout
The sell-off extended beyond tech. The CBOE Volatility Index (VIX) surged 40% to a two-month high. Gold fell over 3.5%, and Bitcoin slipped below $60,000. Meta Platforms dropped 5.5% following reports that it was seeking to raise equity for its AI infrastructure buildout. The Dow's decline was led by high-growth and cyclical names, reflecting broad-based risk aversion.
Investors are now focused on next week's inflation data and any signals from the Federal Reserve. Concerns are mounting that rates could remain elevated—or even rise—just as companies ramp up AI-related spending. A softer inflation reading could lure buyers back to the winners of the recent rally, but for now, the market's focus has shifted from chasing growth to questioning valuations.
The sell-off marks a sharp reversal for a market that had been riding high on AI optimism and expectations of a dovish Fed. With the jobs report reaffirming a resilient economy, the path forward for equities looks more uncertain, and traders are bracing for a potentially bumpy summer.
