Big fall in US tech shares as AI stocks are hit

US technology stocks plummeted on Friday, with chipmakers and memory companies bearing the brunt of a sell-off triggered by a robust jobs report. The data intensified expectations that the Federal Reserve may increase interest rates before the end of the year to curb economic growth.

The S&P 500 index closed down 2.64%, ending a rally that had been largely driven by companies benefiting from the artificial intelligence boom. The technology-heavy Nasdaq Composite suffered its worst performance since April 2025, falling nearly 4.2%. This downturn occurred just a week before the highly anticipated initial public offering of Elon Musk's SpaceX, which is poised to be the largest IPO in history.

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With inflation moving higher and the labour market improving considerably, the Fed is unlikely to ease policy in 2026.

The sell-off broadened beyond the tech sector as the day progressed, impacting consumer cyclical and basic materials groups. The strong US jobs figures led investors to bet on further Fed tightening. US government bonds also saw a sharp decline, with the two-year yield reaching a 15-month high.

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In the very near term, given how extended momentum is and how concentrated trades are, the Fed turning hawkish could be the biggest risk.

Economists noted that with rising inflation and a strengthening labor market, the Fed is unlikely to ease policy in 2026. While some tech sectors are relatively insensitive to rate hikes, the current market momentum and concentrated trades present risks. Higher interest rates could significantly damage this momentum rally.

Market participants are bracing for a wave of new equity supply, including potential listings from AI startups like OpenAI and Anthropic, each valued at around $1 trillion. Alphabet's plan to raise $85 billion for AI infrastructure and Meta's potential multi-billion dollar stock offering add to this supply pressure. Concerns about the market's capacity to absorb this influx of shares are growing, especially if the current sell-off continues.

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We are sitting on a massive momentum rally.

Semiconductor stocks, previous leaders of the rally, fell sharply. Broadcom missed revenue forecasts, leading to an approximately 8% drop in its share price on Friday. The Philadelphia Semiconductor index declined 9.6%, though it remains up nearly 80% year-to-date. Arm Holdings and Micron saw declines of over 12%.

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Higher interest rates would damage that.