Wall Street slides as technology stocks sell off amid fears of a more hawkish Fed

The Nasdaq Composite and S&P 500 fell to their lowest levels in more than a week on Tuesday, weighed down by sharp losses in semiconductor stocks as investors braced for a more hawkish Federal Reserve and increased scrutiny of debt-funded spending on artificial intelligence infrastructure.

If the selloff continues, the Nasdaq 100 could lose more than $1 trillion in market value.

Nvidia shares fell 3%, while Alphabet declined 1.2%. Chipmakers were hit particularly hard, with Intel, Marvell Technology, and Advanced Micro Devices dropping between 6.2% and 8.7%.

Memory chip makers Micron Technology and SanDisk, two of the best-performing stocks in the S&P 500 this year, plunged 12% and 13%, respectively.

The Philadelphia Semiconductor Index tumbled 7.3%, while the S&P 500 Information Technology Index fell 3.2%.

AI stocks pressured by spending and debt concerns

The latest selloff followed a weak session for major technology stocks, driven by concerns over massive spending on artificial intelligence infrastructure by big technology companies, particularly as valuations remain elevated.

"The AI trade has become one of the most crowded positions in global markets, and when everyone owns the same stocks, the exit door becomes very narrow very quickly," said Nigel Green, Chief Executive Officer of deVere Group.

At 9:35 a.m. ET, the Dow Jones Industrial Average was down 395.32 points, or 0.76%, at 51,317.39.

The S&P 500 fell 114.96 points, or 1.54%, to 7,357.83, while the Nasdaq Composite dropped 533.73 points, or 2.04%, to 25,632.87.

The interest-rate-sensitive Russell 2000 Index declined 1.7%, while the CBOE Volatility Index (VIX), often referred to as Wall Street's fear gauge, rose to its highest level in more than a week, gaining 2.92 points to 20.13.

Investors rotate into defensive sectors as SpaceX declines

Only four of the eleven major S&P 500 sectors traded higher, with consumer staples leading gains, up 1.2%.

As richly valued technology stocks came under pressure, investors increasingly shifted toward other areas of the market.

Previously beaten-down software stocks posted gains, with ServiceNow and Atlassian each rising 2.5%, while Adobe gained 1.4% and Salesforce added 1.2%.

Meanwhile, Elon Musk's SpaceX fell 4.8%, extending a decline that has erased more than $600 billion in market value over the past three trading sessions.

SpaceX, which began trading earlier this month, recently joined the list of large companies turning to the bond market to raise capital.

"Although SpaceX is not yet part of the Nasdaq indexes, its move into the bond market to finance heavy spending on artificial intelligence and infrastructure has revived concerns about whether major technology companies are overspending in these areas and becoming increasingly dependent on debt," said Ipek Ozkardeskaya, Senior Market Analyst at Swissquote Bank.

Rate hike bets weigh on markets ahead of inflation data

Traders have increased bets that the Federal Reserve could deliver a second interest rate hike by December, according to LSEG data, compared with expectations for only one 25-basis-point increase two weeks ago.

Those expectations have strengthened as markets price in a more hawkish monetary policy approach under new Federal Reserve Chair Kevin Warsh.

Despite the recent pullback, the S&P 500 remains on track for its strongest quarterly gain in six years, supported by the Middle East ceasefire and stronger-than-expected corporate earnings. However, concerns about stretched valuations in AI-related stocks have resurfaced.

Investors are now awaiting Micron Technology's earnings report on Wednesday, which could provide important clues about the outlook for memory chips and the broader AI sector after this year's powerful rally.

Markets are also closely watching Thursday's release of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge.

In market breadth, declining stocks outnumbered advancing stocks by 2.12-to-1 on the New York Stock Exchange and by 1.65-to-1 on the Nasdaq.

The S&P 500 recorded two new 52-week highs and three new lows, while the Nasdaq Composite registered 19 new highs and 95 new lows.