Nasdaq drops 2.2% as chip stocks lead broad tech sell-off

The Nasdaq Composite fell 2.2% to its lowest level in more than a week as semiconductor stocks plunged, extending a sell-off that erased more than $1 trillion from the index.

"It doesn't appear to be closely tied to the fundamentals of the AI story, but rather to the heavy concentration and strong inflows into global tech over the past few months now starting to unwind," Ross Mayfield, investment strategy analyst at Baird, said.

The S&P 500 shed 1.4%, while the Dow Jones Industrial Average dipped 0.1%. The Philadelphia Semiconductor Index fell more than 7% at one point. SanDisk tumbled 14%, the worst performance in the S&P 500, trimming its year-to-date gain to 727%. Micron Technology dropped 13%, and Western Digital lost 11%. Nvidia fell 4%, pushing its market value below $5 trillion. Qualcomm slid 8.5% as reports emerged that it is in talks to acquire AI infrastructure firm Modular Inc. for an estimated $4 billion.

The sell-off reflected three converging pressures: growing expectations that the Federal Reserve under Chair Kevin Warsh will raise interest rates twice by December, concerns that massive AI infrastructure spending has yet to produce proportional revenue, and profit-taking after a rally that pushed memory chip stocks to extraordinary gains. Investors now face a test of whether the AI trade can sustain its momentum through second-quarter earnings season, with Micron reporting Wednesday and Cerebras after Tuesday's close.

Rate Fears and AI Spending Questions Weigh on Sentiment

Markets increasingly price two quarter-point rate increases by December, up from one expected two weeks ago. Higher rates reduce the present value of expected earnings from fast-growing technology companies and raise borrowing costs for companies financing large AI projects through debt.

The sell-off began in Asia, where South Korea's Kospi fell almost 10%. SK Hynix closed more than 12% lower, while Samsung Electronics also declined. Japan's Nikkei 225 lost 3.55%, ending an eight-session winning run. European markets followed, with the Stoxx 600 falling about 1% and its technology sector losing about 3%.

Defensive Stocks Gain as Rotation Accelerates

Consumer staples led the advancing S&P 500 sectors with a gain of about 1.2%. IBM climbed 4% after JPMorgan upgraded the stock to overweight, citing potential in its software business and AI adoption tailwinds. Microsoft rose 2%, bucking the broader tech weakness. Walmart, Procter & Gamble, Johnson & Johnson and Merck also moved higher as investors shifted toward companies less exposed to the AI spending cycle.

The 10-year Treasury yield ticked down to 4.50% from 4.51%. The U.S. dollar index climbed 0.4% to 101.40. Gold futures declined nearly 2% to $4,125 a troy ounce, while West Texas Intermediate crude fell about 1% to $73.40 a barrel.

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