Tech selloff deepens as AI cost fears and hawkish Fed expectations trigger 2% Nasdaq plunge

Tech Selloff Accelerates Amid Dual Market Pressures

Wall Street experienced sharp declines on Tuesday as a tech selloff intensified, driven by growing investor concerns about debt-funded AI spending and an increasingly hawkish Fed. Nasdaq futures drop exceeded 2%, leading broader market declines as semiconductor stocks bore the brunt of the selling pressure 1

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. At the opening bell, the S&P and Nasdaq drop sent the S&P 500 down 1.42% to 7,366.51, while the Nasdaq Composite slipped 2.36% to 25,549.757 3

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. If losses hold through the session, the Nasdaq 100 would lose over $1 trillion in market value, marking a significant reversal after a strong quarterly rally 2

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Semiconductor Stocks Plunge on AI Cost Fears

Semiconductor stocks led the market downturn as AI cost fears resurfaced amid stretched valuations and rising borrowing costs. Nvidia fell 3.7%, while Intel, Marvell Technology, and AMD dropped between 3.8% and 9% 2

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. Memory chipmakers faced even steeper losses, with Micron Technology tumbling 11% and SanDisk falling 12.6%, despite being among the best performers on the S&P 500 this year 2

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. The Philadelphia SE Semiconductor index tumbled 7.6%, reflecting broad-based weakness across the chip sector 2

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. Market participants are closely watching Micron's results expected on Wednesday, which could offer crucial clues on the outlook for the memory and AI chip sector after a searing rally this year 2

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Concerns About Hawkish Fed Drive Market Uncertainty

Concerns about hawkish Fed policy intensified as traders now expect the U.S. Federal Fed to hike borrowing costs by a total of 50 basis points by December, according to the CME Group's FedWatch Tool, up from one 25-basis-point hike anticipated just two weeks ago 1

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. Investors are pricing in more aggressive monetary policy under new Chair Kevin Warsh, creating additional headwinds for rate-sensitive technology stocks. The yield on the short-term 2-year Treasury note slipped about 4 basis points to 4.19%, though it touched its highest point since February 2025 in the previous session 1

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. Market uncertainty escalated as the CBOE Volatility Index, Wall Street's fear gauge, climbed to an over one-week high, rising 2.3 points to 19.58 2

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Debt-Funded AI Spending Raises Red Flags

The weakness in AI spending concerns stems from companies increasingly financing infrastructure investments through debt at a time when elevated borrowing costs make such spending more expensive. SpaceX became the latest megacap to tap the bond market following a blockbuster IPO earlier this month, despite reporting net losses in the previous year 1

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. "The fact that it is jumping on the bond train to fund excessive AI and infrastructure spending revives earlier concerns that Big Tech may be spending too much on AI infrastructure and increasingly financing that spending through debt," said Ipek Ozkardeskaya, senior market analyst at Swissquote Bank 1

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. Ross Mayfield, investment strategy analyst at Baird, noted that "the trade has been highly concentrated and flow-driven, which makes it vulnerable to relatively small shifts in sentiment" 2

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. This vulnerability becomes particularly acute when interest rate hikes threaten to make debt servicing more costly, raising questions about the sustainability of current AI infrastructure buildouts and their stretched valuations.