AI sell-off deepens as Nasdaq drops 1% in volatile session

The S&P 500 fell 0.3% to 7,386.65 after swinging between a 1% gain and a 2.3% loss, as AI-related stocks reversed an early rebound.

"The market is recalibrating after an extraordinary run in AI names, and that process is going to be messy," said Jay Woods, chief market strategist at Freedom Capital Markets. "The Fed's inflation concerns are adding another layer of uncertainty that keeps investors on edge."

The tech-heavy Nasdaq Composite dropped 1% to 25,678.82, while the Dow Jones Industrial Average added 86 points, or 0.2%, to 50,872.11. The Cboe Volatility Index surged 15%, reflecting heightened anxiety. Nearly three out of every four stocks within the S&P 500 rose, but the index's heavy weighting in technology meant the AI sell-off overwhelmed broader gains.

The sell-off leaves the S&P 500 more than 4% below its record high set June 2, raising questions about whether the AI trade that powered this year's rally has further to run or is entering a prolonged correction. Investors now face two key inflation reports this week — consumer prices Wednesday and producer prices Thursday — that could determine the Federal Reserve's next move.

Semiconductor stocks bore the brunt of the selling after an extraordinary run that had seen the sector surge nearly 85% for the year through late last week. Marvell Technology dropped 7.6%, erasing a chunk of Monday's 9.6% rebound, while Advanced Micro Devices sank 3%. Micron Technology swung from a gain of 4% to a loss of 10% before closing down 1.4%, a day after it had soared 9.9%.

The volatility extended beyond individual names. A widely followed index of semiconductor companies dropped almost 6% at its session low before paring losses. Nvidia, the largest company in the S&P 500 by market value, fell nearly 3%.

Oil Eases, Yields Dip

Oil prices provided a rare bright spot for inflation-wary investors. Brent crude sank 3% to $91.45 a barrel, while West Texas Intermediate fell 3.5% to $88.11, before paring losses after President Donald Trump posted on social media that Iran shot down a US Army Apache helicopter near the Strait of Hormuz. "The United States must, of necessity, respond to this attack," Trump said.

The decline in oil helped ease Treasury yields, with the 10-year note falling to 4.52% from 4.56% late Monday. Still, the yield remains well above its 3.97% level from before the war with Iran, keeping pressure on equity valuations.

What's at Stake

The question hanging over markets is whether last week's sell-off was the start of a prolonged downturn or a healthy correction that shakes out excessive optimism. Michael Wilson, chief equity strategist at Morgan Stanley, argued the latter in a note Monday, writing that "a correction was inevitable and ultimately healthy if this bull market is going to extend into year-end."

For now, the data calendar offers the next test. The consumer price index for May is due Wednesday, followed by the producer price index Thursday. Both readings will shape expectations for the Fed's rate path, with traders currently pricing in at least one rate increase by year-end.

This article is for informational purposes only and does not constitute investment advice.