US Markets: Nasdaq and S&P 500 Fall as Tech Giants Face AI Spending Fears

Major US indices witnessed a mixed session on Thursday, as the heavyweights in the technology sector pulled the Nasdaq and S&P 500 into the red. While the semiconductor industry showed remarkable strength, concerns regarding the sustainability of AI-related capital expenditure and rising inflation weighed heavily on investor sentiment.

Big Tech Dragging Down the Nasdaq

The Nasdaq Composite experienced a notable decline, falling 120.07 points or 0.47% to close at 25,356.57. This downward movement was largely driven by losses in "Big Tech" megacaps, including Nvidia, Microsoft, and Alphabet. Apple shares also faced pressure following news that the company hiked prices for iPads and MacBooks to offset rising memory and storage chip costs.

A primary concern for investors is the "hyperscaler" spending model. While companies like Micron are reporting massive revenues, market analysts are questioning who will ultimately foot the bill for this intensive AI infrastructure buildup. As Carol Schleif, CIO at BMO Family Office, noted, one company's blowout earnings often come at the expense of another's future margins.

Semiconductor Resilience Amidst Tech Volatility

In stark contrast to the broader tech slump, the semiconductor sector showed incredible resilience. The Philadelphia SE Semiconductor index rose, tracking toward its strongest quarter on record.

Micron Technology saw its shares soar after delivering earnings and forecasts that significantly beat Wall Street estimates. This positive momentum extended to other chip-related players, with Sandisk, Qualcomm, Western Digital, and Seagate Technology all recording gains. This surge highlights the ongoing, robust demand for high-end memory and processing components required for the AI revolution.

Inflationary Pressures and Federal Reserve Outlook

The broader economic landscape provided a challenging backdrop for Wall Street. US inflation rose above 4.0% in May—the highest level in three years—driven primarily by higher energy prices. While oil prices have recently dipped below pre-war levels, the "toasty" inflation data has heightened fears of a hawkish Federal Reserve.

Traders are now pricing in a higher probability of interest rate hikes, with LSEG data suggesting expectations of at least a 25-basis-point increase before the end of the year. On a more positive note, the economy showed growth resilience, with final Q1 GDP data revised upward to 2.1% from an earlier estimate of 1.6%, and jobless claims showing a higher-than-expected decline.

M&A Activity and Sector Specifics

Beyond the tech and macro data, the biotech sector saw significant movement. Bio-Techne Corp shares jumped following the announcement that Germany's Merck KGaA has agreed to acquire the firm for $73 per share in cash, valuing the enterprise at approximately $11.3 billion. Meanwhile, the Dow Jones Industrial Average managed to buck the trend, rising 87.33 points (0.17%) to finish at 51,936.23.

Key Takeaways

  • AI Spending Skepticism: Despite massive earnings from chipmakers like Micron, investors are worried about the long-term debt and spending sustainability of AI hyperscalers.
  • Inflationary Headwinds: US inflation breaking the 4% threshold has increased market expectations for a Federal Reserve interest rate hike later this year.
  • Semiconductor Strength: The chip sector remains a bright spot, with the Philadelphia SE Semiconductor index on track for a record-breaking quarter.