Key Takeaways
- US stocks fell Tuesday as a global tech selloff extended into a second day.
- The declines follow a rally in AI-exposed stocks and several rounds of debt-based capital raising at large tech firms.
- Expectations that the Fed will raise interest rates later year have weighed on stocks in recent sessions.
US stocks fell Tuesday after global markets extended a major tech selloff that has hit some of the year’s biggest winners.
The Morningstar US Market Index was down 1.3% mid-morning, with the tech-heavy Nasdaq sliding 2.0% and the S&P 500 1.3% lower, as markets faced a second day of sharp selling amid concerns over surging tech stocks and frothy AI valuations.
SpaceX SPCX shares recovered Tuesday morning after fall more than 3% at the open. The stock shed $400 billion in market value on Monday in its third straight session of losses. The newly-listed stock hovered midday Tuesday just above its first-day opening price of $150.
Alphabet shares slipped 1.2% late morning Tuesday, after shedding 5% on Monday to record their worst day in over a year as the departure of two high-profile researchers added to mounting AI concerns. Fellow Magnificent Seven stocks Microsoft MSFT, Tesla TSLA and Amazon AMZN also opened in the red.
Javier Correonero, Morningstar senior equity analyst, says the sharp selling is likely profit taking after market exuberance has pushed tech stocks to record highs this year. “There’s a lot of froth in the markets,” he adds.
Chipmakers Deepen Tech Rout
Chipmakers Micron MU and Intel INTC, meanwhile, dropped 11.0% and 3.8% through late morning, respectively, despite having been among the few technology stocks to close higher in Monday’s sectorwide selloff. Micron is due to report earnings Wednesday.
South Korean chipmakers SK Hynix 000660 and Samsung 005930 each plunged 13% in Tuesday’s session, dragging the country’s KOSPI benchmark down 10% from its record high. Chinese equities in Hong Kong extended declines to enter bear market territory.
Tuesday’s retreat in chipmakers—key drivers of the AI equity rally—comes as investors begin to question whether the sector’s future returns can justify current bumper spending. Meanwhile, hawkish commentary last week from new Federal Reserve chair Kevin Warsh suggests an interest rate hike could be likely before the end of the year, potentially hampering the costly AI buildout.
The AI Rally Cut Short?
Tech stocks have rallied to record highs this year, as enthusiasm around the AI trade has largely provided a buffer to other geopolitical and economic risks.
Major AI infrastructure announcements by US tech firms have helped fuel that enthusiasm. But as those hyperscalers increasingly seek external sources—including debt and equity markets—to pay for those mammoth plans, concerns have emerged over funding circularity within the sector and wider concentration risks.
“We’re increasingly seeing questions about who can stay at the frontier of AI,” Neil Wilson, UK Investor Strategist at Saxo, says.
“It looks likes bulls are pulling in their horns ahead of the Micron earnings, which is reading across the entire AI play and taking some froth off the top, with SpaceX’s tumble starting to look a concern and yet another debt raise demanding whether these firms have the cash to continue investing,” he notes.
However, Wilson suggests that the pullback is likely more a symptom of the revised US interest rate outlook than as full rethink of the AI trade. He adds that a Fed rate hike could now be on the table as soon as July.
“Ultimately, this is probably more of a reset against a higher rate outlook than a precursor to anything apocalyptic,” he says.
