US stocks fall as chip selloff deepens

US stocks declined on Friday as investors reassessed the artificial intelligence-driven rally that has pushed markets higher since the beginning of the year, deepening a selloff in semiconductor shares as the launch of a new Chinese AI model added further pressure on the sector.

After a powerful rally lifted the major indexes to record highs, investors began reducing their exposure to chipmakers amid growing concerns over the scale of spending on artificial intelligence and the returns those investments are likely to generate.

Chip stocks extended losses from the previous session, with Nvidia shares falling 1.4%.

The decline, combined with an early rise in Apple shares, briefly allowed the iPhone maker to reclaim the title of the world's most valuable company from Nvidia.

Chinese competition weighs on technology shares

The Philadelphia Semiconductor Index fell 1.8% and was on track for its worst weekly performance since March, having lost more than 20% from the record high reached in late June.

Fiona Cincotta, Senior Market Analyst at City Index, said the current market moves "appear to be driven primarily by the decline in chip stocks, which is weighing on broader market sentiment."

Pressure intensified after Chinese artificial intelligence startup Moonshot AI announced the launch of its Kimi K3 model, which contains 2.8 trillion parameters and is described by the company as the world's largest open-weight model.

Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones Investments, said growing competition from Chinese open-source models had raised concerns over whether US companies could maintain their technological lead.

Some Chinese models are now approaching the performance of systems developed by Anthropic and OpenAI, he said, contributing to weakness in technology shares. The pressure began in Asian markets before spreading to Wall Street.

All three major US indexes were heading for weekly losses despite a strong start to the second-quarter earnings season and better-than-expected inflation data, as concerns surrounding the semiconductor sector overshadowed the positive developments.

Netflix drops 9% as Wall Street's fear gauge rises

Netflix shares fell 9% after the company's third-quarter outlook came in below Wall Street estimates, weighing on the communication services sector, which declined 2.4%.

The CBOE Volatility Index, widely known as Wall Street's fear gauge, rose 1.30 points to 18.03, its highest level in more than a week.

By 10:10 a.m. Eastern Time, the Dow Jones Industrial Average was up 4.56 points, or 0.01%, at 52,557.53.

The S&P 500 fell 43.71 points, or 0.58%, to 7,490.05, while the Nasdaq Composite dropped 323.79 points, or 1.25%, to 25,558.15.

The Nasdaq had earlier fallen to its lowest level in three weeks before recovering part of its losses.

Middle East tensions remain in focus

Geopolitical developments in the Middle East continued to influence markets after the United States launched strikes on bridges and an airport in Iran, while Tehran responded by targeting a power generation and desalination plant in Kuwait.

Meanwhile, data showed US consumer sentiment rose in July to its highest level in five months. Analysts, however, said the improvement could prove temporary as renewed US-Iran tensions drove gasoline prices higher.

Among other stocks, Intuitive Surgical shares fell around 11.4% after the medical device maker left its forecast for growth in the use of its da Vinci surgical system unchanged and warned that changes to health insurance plans could prompt patients to postpone some procedures.

Declining stocks outnumbered advancing shares by a ratio of 1.24 to 1 on the New York Stock Exchange and 1.55 to 1 on the Nasdaq.