S&P 500 drops 1.6% as AI momentum unwind deepens into June

Wall Street's AI-fueled rally continued to unravel Wednesday, with the S&P 500 falling for a second straight session as a rotation out of semiconductor and technology stocks gathered pace.

The S&P 500 fell 1.6% to 7,266.99, extending its first back-to-back decline in three weeks, as a selloff in artificial-intelligence stocks deepened and mixed inflation data did little to calm rate-cut uncertainty.

"At this point our assumption is this is still a positioning unwind, not a regime change, but we don't think it has fully run its course," Jonathan Krinsky, chief market technician at BTIG, said. "As a result, we would suggest you remain seated with your seat belts fastened, as we expect more near-term turbulence."

The Dow Jones Industrial Average sank 953 points, or 1.9%, to 49,918.78, while the Nasdaq Composite lost 2% to 25,169.50 — its lowest close since May 4. The iShares Semiconductor ETF tumbled 3.7%, putting the chip benchmark 12% below its June 3 record high. Super Micro Computer plunged 28% after announcing plans to raise $7 billion through equity-linked financing to fund AI server component purchases. Declining stocks outnumbered advancers by a 1.87-to-1 ratio on the New York Stock Exchange and 1.77-to-1 on the Nasdaq.

The rotation out of high-flying technology shares is spilling into other corners of the market that benefited from data-center buildout spending, with industrials falling 3.4% to lead sector declines. The Cboe Volatility Index added to recent gains, and investors are now pricing in at least one quarter-point rate hike by year-end, according to CME FedWatch. The next test comes Thursday with the producer price index for May, followed by the European Central Bank's rate decision and SpaceX's expected IPO pricing.

Inflation Data Offers No Relief

The consumer price index for May showed headline inflation rising 4.2% from a year earlier, the largest gain since April 2023, driven by higher gasoline and energy costs as the Middle East conflict disrupted supply routes through the Strait of Hormuz. Core CPI, which excludes food and energy, cooled to a 0.2% monthly increase from 0.4% in April, matching economist forecasts. While the core reading offered some reassurance, the headline number remains well above the Federal Reserve's 2% target, reinforcing expectations that the central bank will hold rates steady at its June meeting.

Geopolitical Risk Compounds Tech Weakness

President Donald Trump said the U.S. would attack Iran again if no peace deal is secured, following one of the most significant exchanges of hostilities in two months. The threat pushed oil prices higher, adding to inflationary pressure and weighing on industrial and transportation stocks. Trucking companies XPO, J.B. Hunt Transport Services and Old Dominion Freight Line fell after Amazon.com announced an expansion of its less-than-truckload freight services in the U.S.

The U.S. 10-year Treasury yield rose as traders priced in higher-for-longer rates, while the dollar strengthened against major peers. Gold edged higher as investors sought haven assets. The Russell 2000 index of small-cap stocks held up better than the major benchmarks but still ended the session down more than 1%.

Consumer staples was the only S&P 500 sector to post a gain, rising 1.7%, as investors rotated into defensive names. Healthcare and real estate also outperformed, reflecting a shift away from growth-oriented positions.

The much-hyped $1.75 trillion listing of SpaceX on Friday, targeting a record $75 billion capital raise, could add further pressure on technology stocks as concerns mount over excessive optimism in the sector. Oracle shares fell about 1% in after-hours trading following a mixed earnings report.

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