Wall Street recovered part of its early losses on Tuesday as gains in defensive sectors helped offset a sharp technology stock selloff.
Consumer staples and healthcare shares attracted buyers, while stronger-than-expected US business activity data provided additional support to market sentiment.
However, weakness across semiconductor and memory stocks continued to pressure the broader artificial intelligence trade.
S&P 500 and Nasdaq Recover From Session Lows
The S&P 500 was down approximately 1% at 7,401.11 by 12:16 ET. Earlier in the session, the index had fallen as much as 1.7%.
The Nasdaq Composite declined 1.4% to 25,796.28 after previously dropping as much as 2.5%.
Meanwhile, the Dow Jones Industrial Average reversed its opening losses and gained 0.2% to trade near 51,810.92.
The mixed performance reflected a rotation away from high-growth technology stocks and toward more defensive areas of the market.
Technology Stocks Extend Their Decline
Major US technology companies remained under pressure during Tuesday’s session.
Nvidia shares fell nearly 3%, while Tesla dropped approximately 5%.
Memory and storage stocks suffered some of the largest losses. Sandisk and Micron Technology ranked among the weakest performers on the Nasdaq.
Other semiconductor companies, including Lam Research, Qualcomm and Marvell Technology, also recorded sharp declines.
Investors Question AI Stock Valuations
Concerns are growing over whether elevated technology stock valuations can be supported by actual financial returns.
Companies have announced massive spending plans for artificial intelligence infrastructure, including data centres, processors and cloud computing capacity.
However, investors are increasingly demanding evidence that these investments will lead to stronger revenue and earnings growth.
The AI boom has lifted a wide range of technology stocks. Nevertheless, doubts are emerging about how much additional upside remains after the sector’s powerful rally.
Crowded AI Positions Increase Market Risk
UBS analysts warned that many investors are holding similar positions across the artificial intelligence sector.
This crowded positioning creates what the bank described as a “same bus” dynamic. If several large investors decide to reduce exposure simultaneously, selling pressure can quickly intensify.
Some hedge funds have already started trimming their AI-related holdings.
UBS also warned that capital expenditure upgrades could slow as infrastructure investment reaches a natural limit. This could leave expensive and heavily owned stocks vulnerable to weaker performance.
Asian Chip Stocks Suffer Heavy Losses
The technology selloff began during Asian trading.
Samsung Electronics and SK Hynix fell more than 12% each after recording substantial gains earlier in the year.
The steep declines pushed South Korea’s KOSPI down approximately 10%. This represented the index’s second-largest one-day loss in its history.
The rout across Asian chipmakers increased concerns about the sustainability of the global semiconductor and AI infrastructure rally.
Hawkish Federal Reserve Adds Pressure
The macroeconomic environment has also become less supportive for growth stocks.
Markets are now pricing in two Federal Reserve interest rate increases this year, compared with expectations for only one previously.
Higher interest rates and elevated bond yields tend to place pressure on technology stocks. Their valuations are often based heavily on earnings expected far into the future.
As yields rise, the present value of those future profits falls. Investors may also shift money toward bonds and other income-producing assets.
AI Companies Seek More Outside Funding
Questions are also emerging about how major technology companies will finance their growing artificial intelligence investments.
Alphabet recently announced plans for an $80 billion stock sale to support its AI infrastructure expansion. Its shares fell close to 5% during the previous session.
Meta Platforms is also reportedly considering a major public share offering to finance additional AI spending.
Trade Nation senior market analyst David Morrison noted that large US technology companies historically funded expansion through operating cash flow and occasional debt issuance.
However, many companies are now turning to external financing as their capital requirements increase.
Nvidia Returns to the Bond Market
Nvidia recently announced plans to raise $25 billion through a bond offering, its first such issuance in five years.
The offering highlights the enormous amount of capital required to expand AI computing capacity.
Investors must also consider the expected initial public offerings of Anthropic and OpenAI after the summer.
These fundraising plans could compete for investor capital at a time when existing technology companies are also issuing shares and debt.
US Business Activity Reaches Five-Month High
Positive US economic data helped Wall Street recover from its early lows.
S&P Global’s preliminary Composite PMI rose to 52.2 in June from 51.5 in May. This marked the strongest reading in five months.
A PMI reading above 50 indicates that business activity is expanding.
The Services PMI increased to 51.3 from 50.7, reaching a four-month high and beating economists’ expectations.
Manufacturing output also accelerated sharply. The index rose to 57.7, exceeding forecasts and recording its fastest expansion since July 2021.
Markets Await GDP and PCE Inflation Data
Investors are now preparing for revised first-quarter US gross domestic product data and the latest Personal Consumption Expenditures price index.
Both reports are scheduled for release on Wednesday.
The PCE index will receive particular attention because it is the Federal Reserve’s preferred inflation measure.
A stronger inflation reading could reinforce expectations for further rate increases. That outcome may place additional pressure on technology and other growth stocks.
Alphabet Falls After AI Executive Departures
Wall Street also recorded mixed performance during Monday’s session.
The S&P 500 fell nearly 0.4%, while the Dow Jones gained approximately 0.3%. The Nasdaq Composite declined 1.3%.
Alphabet was one of the Nasdaq’s largest sources of weakness, falling almost 5%.
The decline followed the departure of two prominent artificial intelligence executives within a matter of days, raising concerns about talent retention and leadership stability.
SpaceX Reverses Post-IPO Gains
SpaceX also suffered a major decline during Monday’s trading.
The stock dropped approximately 16% as investors reassessed its valuation following a strong initial public offering and market debut earlier in the month.
The reversal added to broader concerns that several high-profile technology and AI-related investments had risen too quickly.
Investor attention will now remain focused on interest rates, AI spending, company earnings and evidence that infrastructure investments can generate sustainable profits.
