US Stocks Plunge: Semiconductor Index Suffers Worst Day Since 2020 Amid AI Correction

The US stock market suffered a sharp decline on Friday, with the Philadelphia Semiconductor Index experiencing its worst single-day drop since March 2020, falling over 10%. The Nasdaq Composite also saw its most significant daily loss in over a year, and the broader S&P 500 index fell 2.64%. This broad market sell-off erased approximately $1.3 trillion in market value.

Analysts point to several key factors behind the market's steep fall. Broadcom's earnings forecast, which fell short of high expectations for custom AI chip demand, acted as a turning point, dampening AI-driven optimism. Steve Sosnick, a strategist at Interactive Brokers, noted that while a single cause is hard to pinpoint, Broadcom's guidance made investors realize that not all companies benefiting from AI spending are immune to market pressures. Broadcom's stock itself dropped 7.92% on Friday and nearly 20% over two trading days.

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Although the trigger is difficult to attribute to a single cause, Broadcom's guidance did change market sentiment. It made investors realize that not all companies benefiting from AI spending are immune.

Further exacerbating the situation, strong US May employment data fueled concerns that the Federal Reserve might maintain or even increase interest rates, adding pressure to the stock market. Jose Torres, an economist at Interactive Brokers, observed that the divergence between rising yields and falling oil prices reflects growing market doubts about a policy pivot. The US 2-year Treasury yield climbed to a 16-month high of 4.16%.

Other contributing factors include major tech companies like Alphabet and potentially Meta raising substantial capital for AI infrastructure, prompting a reassessment of the balance between capital expenditure and shareholder returns. Market analysts also highlight the over-concentration of gains in AI-related stocks, noting that only about 43% of S&P 500 components saw gains in May, making the market vulnerable. Despite the sharp correction, many strategists view this as a technical pullback rather than the end of the long-term AI bull trend, especially as semiconductor stocks like Micron and Marvell, despite Friday's losses, still show strong year-to-date gains.

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The divergence between rising yields and falling oil prices reflects growing market doubts about a policy pivot.