Nasdaq 100 futures drop 1.72% as tech rally loses steam after hours

US equity futures closed lower across the board Tuesday, with the tech-heavy Nasdaq 100 leading declines as risk appetite faded after a strong start to the third quarter.

Nasdaq 100 futures slumped 1.72% on Tuesday, leading a broad decline across US equity index futures as technology shares reversed course after hours.

"The market is showing too many red flags, and investors should take profits whenever they can," said Savita Subramanian, equity strategist at Bank of America, which warned clients this week of a potential three-wave correction in the S&P 500.

S&P 500 futures fell 0.48%, while Dow Jones Industrial Average futures declined 0.29%. Small-cap Russell 2000 futures dropped 0.95%, extending the risk-off tone across market capitalizations. The moves followed a regular session that saw the S&P 500 close at 7,537, up 0.72%, and the Nasdaq Composite add 1.12% to 26,121, driven by continued strength in semiconductor stocks including Nvidia Corp., Advanced Micro Devices Inc., and Intel Corp.

The after-hours reversal suggests traders are reassessing positioning ahead of Federal Reserve Chairman Kevin Warsh's scheduled speech Wednesday at the European Central Bank Forum on Central Banking in Sintra, Portugal, and the June non-farm payrolls report due later this week.

The futures decline was led by technology and growth names, with the Nasdaq 100's 1.72% drop more than triple the decline in the broader S&P 500. The divergence points to profit-taking in the sector that powered the market's second-quarter rally, during which the Nasdaq jumped 21.41% and the S&P 500 gained 14.87%.

Bank of America's global head of technical strategy, Paul Ciana, told clients the S&P 500's stretched valuations and weakening indicators could trigger a decline of as much as 7.6% from current levels, with a potential drop to 7,122 points. Margin debt has surged 54% year over year, a level historically associated with major market peaks, according to the bank.

In cross-asset trading, the 10-year Treasury yield held at 4.47%, while the dollar index edged higher. Brent crude oil traded near $72.07 a barrel, and gold declined 0.32% to $4,160 an ounce, reflecting a modest shift toward cash positioning.

Space Exploration Technologies Corp., which joined the Nasdaq-100 index Tuesday, fell 4.75% to $153.31 in its first session as a constituent, extending a 30% correction from its post-IPO peak. The decline added to pressure on the tech-heavy index.

Markets will also watch for the ISM Manufacturing PMI later this week. US stock and bond markets will be closed Friday for the Independence Day holiday.

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