US equities retreat as tech rotation intensifies and Fed rate hike expectations climb
Investors rotated out of technology and semiconductor stocks on Tuesday as the AI trade lost momentum. Broader market sentiment was weighed down by growing bets that the Federal Reserve will raise interest rates later this year to combat persistent inflation, despite a temporary ceasefire in the Middle East that pulled oil prices lower.
US stock markets declined on Tuesday as investors rotated out of technology and semiconductor stocks, with the S&P 500 falling 1.1%, the Nasdaq Composite dropping nearly 2%, and the Dow Jones Industrial Average declining 0.6%. The sell-off occurred amid growing market expectations that the Federal Reserve may raise interest rates later this year to combat persistent inflation, exacerbated by ongoing geopolitical tensions between Israel and Iran. While oil prices retreated following reports of a ceasefire, broader economic data showed existing home sales rising in May. Meanwhile, OpenAI filed for an initial public offering, and SpaceX prepared for a potentially record-setting debut later in the week.
The decline marked a reversal from Monday’s modest rebound, as chipmaker stocks including Micron Technology, Nvidia, and Broadcom shed earlier gains. The action highlighted the ongoing tug-of-war between AI optimism and growing concerns that persistent inflation could prompt the Federal Reserve to raise rates this year. Treasury yields on policy-sensitive two-year notes surged to their highest level in more than a year, with traders pricing in at least one quarter-point rate hike as soon as October.
Geopolitical developments provided a brief reprieve for energy markets, with Brent crude falling 2% to $92 a barrel and West Texas Intermediate dropping 2.6% to $88 a barrel. These retreats followed reports that Israel and Iran agreed to pause hostilities, although President Donald Trump cautioned that a reignition of bombing could close the Strait of Hormuz. Despite the ceasefire, the region remains volatile, with US Central Command reporting the disabling of an unladen oil tanker in the Gulf of Oman for violating a blockade.
In the corporate sector, OpenAI confirmed it had confidentially filed paperwork for an initial public offering, positioning it alongside rival Anthropic to potentially trade on Wall Street as soon as this fall. Wall Street is also gearing up for a major event on Friday, when SpaceX could make its market debut. The company is offering 555.6 million shares at a fixed price of $135 each, which would raise about $75 billion and value the company at approximately $1.8 trillion.
Broader economic indicators showed resilience in the housing market, with existing home sales jumping 3.2% in May to a seasonally adjusted annual rate of 4.17 million. However, Asian markets displayed mixed reactions to the global macro environment, with South Korea’s Kospi climbing 3.4% after a sharp previous-day decline, while Japan’s Nikkei firmed 0.9%. Structural risks in leveraged exchange-traded funds also came under scrutiny, with one SK Hynix-tracking ETF deviating sharply from its underlying stock’s movement.
