Nasdaq falls 1.3% as tech selloff deepens on AI earnings fears

US stocks extended their July selloff on Thursday, with the Nasdaq Composite leading declines as technology shares came under renewed pressure from concerns about the sustainability of AI-driven earnings growth.

The Nasdaq fell 1.3%, the S&P 500 dropped 0.6%, and the Dow Jones Industrial Average lost 0.31%, extending a week of losses that has erased more than $1 trillion in market value from the tech-heavy index since July 10.

"The market is repricing the durability of AI-related profits after IBM's crash showed that even a modest miss can trigger a severe valuation reset," said Sarah Lin, equity strategist at Edgen. "Investors are now asking whether the earnings supporting AI stock prices are as real as they looked."

The selloff was concentrated in technology and semiconductor names, which have been the primary beneficiaries of the AI capex boom over the past 18 months. The rotation accelerated as investors shifted capital into defensive sectors and value stocks, mirroring a pattern that began after International Business Machines Corp. suffered the worst single-day crash in its 115-year history on July 14, erasing roughly $40 billion in market value on a 3.7% revenue miss.

The divergence between tech and the broader market was stark. JPMorgan Chase & Co. posted net income of $21.2 billion last week — the highest quarterly profit for any U.S. bank in history — while Goldman Sachs Group Inc. reported an 84% jump in net income. Those results underscored a growing divide between the AI-driven tech trade and the rest of the economy, where earnings are being supported by strong credit growth and consumer spending.

The VIX, Wall Street's fear gauge, rose above 22 for the first time in three weeks as options activity picked up, with traders hedging against further downside into the final week of July. Trading volume on the New York Stock Exchange ran about 15% above the 20-day average, reflecting elevated participation from institutional investors rebalancing portfolios.

The catalyst for Thursday's move appeared to be a continuation of the repricing triggered by IBM's preliminary second-quarter disclosure, which showed revenue of $17.2 billion versus the $17.9 billion consensus. BCA Research strategist Peter Berezin has argued that the AI trade represents "primarily an earnings bubble rather than a valuation bubble," a distinction that matters because analysts typically cut profit estimates only after stocks have already fallen.

The 10-year U.S. Treasury yield edged lower by 3 basis points to 4.12%, while the dollar weakened modestly against a basket of major currencies, providing little support for risk assets. Gold rose 0.4% to $2,415 an ounce as investors sought haven exposure.

The next major test for markets comes in the final week of July, when Microsoft Corp., Alphabet Inc., and Amazon.com Inc. are scheduled to report quarterly results. Those reports will provide the clearest signal yet on whether the AI earnings boom is intact or beginning to crack.

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