AI Valuation Fears and Sticky Inflation Drive Second Day of Tech Selloff
U.S. tech stocks extended their decline on Thursday as investors reacted to a hotter-than-expected inflation report and deepening concerns about the sustainability of the artificial intelligence boom. Futures for the S&P 500 and Nasdaq 100 fell, with the Nasdaq dropping 1.2% in premarket trading. The sell-off was driven by fears that higher interest rates could disrupt capital-intensive AI ventures, causing sharp drops in names like CoreWeave and Oracle. While AI chipmaker TSMC reported record profits, the broader market remained volatile due to shifting expectations regarding Federal Reserve policy.
Key points
- S&P 500 and Nasdaq 100 futures declined by 0.3% and 1.2% respectively on Thursday, extending a previous day's retreat.
- A hotter-than-expected U.S. inflation report initially increased bets on a Federal Reserve rate hike, pushing Treasury yields higher before they later stabilized.
- Investors now expect 30 basis points of rate hikes for the remainder of 2026, up from 25 basis points previously, while 2027 expectations remain at 50 basis points.
- CoreWeave fell over 6% in premarket trading after a 15% drop the prior day, with its bonds hitting new lows in secondary markets.
- Oracle and Nebius Group also declined premarket, with Oracle potentially extending an 8.83% slide from the previous session.
- TSMC reported a record quarterly profit of 763.06 billion New Taiwan dollars, a 69% year-over-year increase, driven by robust AI demand.
Background
This volatility follows a period of heightened inflation concerns in September 2026, where markets had already tempered due to fears of Federal Reserve rate hikes. In early September, the 10-year Treasury yield climbed toward 4.75% as traders weighed persistent inflation data and geopolitical strains. Fed Governor Michael Barr had signaled readiness to hike rates if inflation did not convincingly ease, setting the stage for the current sensitivity to hot inflation prints.
Why it matters
The current market turmoil highlights the fragility of AI valuations in a high-interest-rate environment. As the Federal Reserve weighs potential hikes to combat sticky inflation, capital-intensive tech sectors face increased scrutiny over their debt-fueled expansion models. The divergence between strong corporate earnings, such as TSMC's record profits, and falling stock prices suggests investors are prioritizing macroeconomic risks and credit conditions over immediate operational success.
What to watch
Investors will monitor the upcoming U.S. producer price index report for further inflation insights. Quarterly earnings from financial institutions including Charles Schwab, Bank of New York Mellon, U.S. Bancorp, and PNC Financial Services are also due, which may provide additional context on corporate health. The market will also watch for any shifts in Federal Reserve rate hike expectations following the recent inflation data.
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