Wall Street drops to one of its worst days since April on worries about AI stocks and interest rates

U.S. Markets Tumble as AI Stock Rally Loses Steam and Rate Cut Hopes Dim

The U.S. stock market suffered one of its worst days since spring on Thursday as high-flying artificial intelligence stocks retreated and concerns grew that the Federal Reserve might pause its interest rate cutting cycle.

The S&P 500 plunged 1.7%, moving further from its all-time high reached last month. The Dow Jones Industrial Average dropped 797 points, or 1.7%, from its record set the previous day, while the tech-heavy Nasdaq composite fell 2.3%.

Nvidia, which has been a primary driver of market gains this year, fell 3.6%, leading the broad market decline. Other AI-focused companies followed suit, with Super Micro Computer dropping 7.4%, Palantir Technologies sliding 6.5%, and Broadcom falling 4.3%.

Market analysts have increasingly questioned how much higher these AI darlings can climb after their spectacular gains this year. Palantir, for example, had soared nearly 174% year-to-date at the beginning of this month, raising concerns about potential overvaluation in the sector.

“The sensational performance of AI stocks has been one of the main factors propelling the U.S. market to record highs despite economic headwinds like a slowing job market and persistent inflation,” said one market strategist. “But these valuations are now drawing comparisons to the dot-com bubble of 2000, which ultimately burst and caused the S&P 500 to lose nearly half its value.”

Adding to market pressure were growing doubts about whether the Federal Reserve will deliver another interest rate cut in December, as many investors had anticipated. Expectations for a third rate cut this year have dropped significantly, with traders now seeing roughly a 51.9% chance, down from nearly 70% just a week ago, according to CME Group data.

Recent comments from Fed officials have fueled this uncertainty. Susan Collins, president of the Federal Reserve Bank of Boston, said late Wednesday that it’s likely appropriate to keep interest rates steady “for some time” – a notable reversal from her previous position supporting additional cuts.

The Fed’s task has been complicated by the recent U.S. government shutdown, which delayed critical economic data releases on the job market and other economic indicators. This information gap has made it more difficult for the central bank to determine whether a slowing job market or high inflation presents the greater threat.

“The looming data deluge may spur additional volatility in the coming weeks,” warned Doug Beath, global equity strategist at Wells Fargo Investment Institute.

The Walt Disney Company contributed to the market decline, falling 7.7% after reporting quarterly revenue that fell short of analysts’ expectations, despite stronger-than-expected profits. Cisco Systems offered a rare bright spot, jumping 4.6% following better-than-expected earnings and revenue.

Warren Buffett’s Berkshire Hathaway was another notable gainer, rising 2.1%. The legendary investor is known for his value-focused approach and reluctance to buy stocks he considers overpriced.

In the bond market, Treasury yields pushed higher, with the 10-year yield rising to 4.12% from 4.08% late Wednesday, adding further downward pressure on stocks.

International markets also reflected investor caution, with European indices sagging following modest gains in Asia. Japan’s Nikkei 225 rose 0.4%, despite a 3.4% decline in SoftBank Group, which has struggled since announcing it had sold its entire $5.8 billion stake in Nvidia.

The cryptocurrency market wasn’t immune to the sell-off either, with Bitcoin falling below $99,000 after approaching $125,000 last month.

As markets navigate this period of uncertainty, investors remain watchful for upcoming economic data that could either reassure the Fed about inflation progress or signal the need for a more cautious approach to monetary policy easing.