Technology stocks tumbled, dragging major indices lower Tuesday, after a selloff in Korean chipmakers stoked concerns about the sustainability of the artificial-intelligence driven rally.
The S&P 500 declined 1.1%, with semiconductor makers Nvidia Corp and Micron Technology among the biggest drags on the index. The tech-heavy Nasdaq 100 dropped 2.5%, while the Dow Jones Industrial Average slipped 0.3%. The CBOE Volatility Index briefly shot up over 20.
Tech is leading markets lower "as a heavy selloff in Asian chipmakers, including a 10% drop in the South Korean KOSPI Index, is dragging broader equity markets lower amid valuation and capex worries," said Tom Essaye, founder of the Sevens Report.
The drop in the Kospi triggered a circuit breaker with SK Hynix and Samsung Electronics each plunging more than 10%. It follows a local media report that said SK Hynix is slowing expansion of AI memory chip production and shifting emphasis to the cheaper commodity DRAM, sparking worries among traders over demand for AI datacenters. SK Hynix declined to comment on the report.
Micron tumbled as much as 13% ahead of the release of quarterly results on Wednesday. The stock has been this year's top performer in the Philadelphia Semiconductor Index, rallying more than 300% since January before Tuesday's drop.
The tech rally has faltered this month as investors worry that share prices may have run up too far, particularly the big tech companies that are spending hundreds of billions of dollars on AI.
"Hyperscalers are the new software stocks. The group can't get out of its own way as it leads the Magnificent Seven megacaps lower," Michael O'Rourke, chief market strategist at JonesTrading Institutional Services LLC, wrote in a note to clients.
Still, the Nasdaq 100 had risen over 30% since the end of March and some market participants said the breather was likely to be short-lived, given that dip buyers have swooped in after other drops.
"People are looking for reasons to hedge yet stay invested," Julian Emmanuel, Evercore ISI chief equity and quantitative strategist, said in a Bloomberg TV interview.
The rapid buildout of AI data centres has led to a severe squeeze in more traditional memory chips, including the DRAM products that are used in everything from mobile phones and computers to electric vehicles. Mark Li, a Bernstein analyst who tracks the semiconductor industry, warned earlier this year that memory chip prices are going "parabolic."
"Many investors are sitting on large gains with their AI stocks, and any jitters could lead them to cut their position to lock in the gains," said Jian Shi Cortesi, a fund manager at Gam Investment Management. "Right now tech stocks are also particularly sensitive to interest rate outlook and potential Fed rate hikes."
Among single-stock movers, Qualcomm shares dropped after the company said it is in talks for a deal to buy AI software firm Modular Inc.
