Nasdaq sinks 4% and has worst day in a year on AI weakness, rising odds for Fed rate hike

Nasdaq Plunges 4% Amid AI Sector Slump, Fed Rate Hike Probability Rises

Nasdaq sinks 4 and has worst – Friday’s trading saw investors divesting from stocks, bonds, Bitcoin, and gold as the market grappled with a mix of optimism and uncertainty. A robust jobs report, released by the Bureau of Labor Statistics, reignited speculation about potential Federal Reserve interest rate hikes, while a softening in the AI sector triggered a broader sell-off. The tech-heavy Nasdaq Composite dropped 3.7%, marking its worst single-day decline since October 2025, while the S&P 500 fell 2.2% and closed in negative territory for the week. These losses extended a losing streak for both indices, which were poised for their worst performances in over a year.

Strong Jobs Data Shifts Market Focus

The U.S. economy added a surprising 172,000 jobs in May, surpassing forecasts and reinforcing the case for sustained monetary tightening. This development came after recent inflation data suggested rising prices, partly driven by the oil market’s volatility due to tensions with Iran. The jobs report has elevated the likelihood of the Federal Reserve raising rates in the coming months, with traders now estimating a 43% chance of a December hike—up from 26% just a month ago. The CME FedWatch tool reflects this shift, as investors recalibrate expectations following the strong employment figures.

“In the near term, the data confirms that Fed easing is off the table this year, and markets continue to worry that the next move could be a hike,” said James McCann, a senior economist at Edward Jones. He noted that while the central bank’s current stance leans toward maintaining rates, the report’s significance has raised the bar for any potential tightening cycle. “There would need to be signs of a more persistent spike in inflation for the Fed to shift toward raising rates,” McCann added.

Tech Stocks Under Pressure

The Nasdaq Composite’s decline followed a nine-day rally, with the index now in negative territory for the week. The downturn was driven by a selloff in semiconductor chip stocks, which had been a key driver of the tech sector’s recent gains. AI-related equities also faced headwinds, as investors questioned the long-term viability of the sector’s rapid expansion. A popular exchange-traded fund tracking memory chip stocks plummeted over 13% on Friday, signaling growing concerns about valuation risks.

Meta (META) exacerbated the tech sell-off, dropping more than 6% in afternoon trading after reports indicated the company was seeking to raise equity to finance its AI initiatives. This move raised eyebrows among analysts, who warned that tech stocks may be overbought following a sharp rebound. Meanwhile, the Dow Jones Industrial Average, which has less exposure to technology, fell 510 points—or 1%—as investors shifted focus from growth-oriented assets to more defensive ones.

Bitcoin and Gold Rebound Stalls

Bitcoin’s decline mirrored the broader market’s risk-off sentiment, with the cryptocurrency losing over 5% on Friday and hovering near its lowest level since October 2024. The drop came after a key industry player disclosed it had sold Bitcoin for the first time since 2022, triggering panic in the crypto market. This week alone, Bitcoin has fallen more than 17% as traders anticipate higher interest rates, which make non-yielding assets like Bitcoin less attractive.

Gold prices also slumped, declining over 3% and erasing all year-to-date gains. The metal, traditionally seen as a safe-haven investment, faced pressure as the Fed’s rate-hike prospects heightened the appeal of higher-yielding alternatives. “Higher interest rates can make assets like gold that don’t pay income less appealing,” said a market analyst, highlighting the tension between inflation concerns and the cost of capital.

Fed Policy Balancing Act

The jobs report has forced the Federal Reserve to reconsider its policy trajectory. While the central bank had previously signaled a preference for rate cuts, the data now suggests a more hawkish approach may be necessary to contain inflation. “One report does not make policy, but a report of this magnitude changes probabilities,” remarked Nigel Green, CEO of DeVere Group, emphasizing the market’s swift reaction to the economic indicator.

With new Fed Chair Kevin Warsh taking the helm, the Federal Reserve faces a complex balancing act. The upcoming meeting will be critical as policymakers navigate diverging views within the FOMC rate-setting committee. McCann noted that Warsh’s first decision will depend on whether inflation remains elevated or if the labor market stabilizes, which could influence the Fed’s timeline for action.

Oil Prices and Treasury Yields Reflect Market Nerves

Oil prices dipped on Friday, with Brent crude futures falling 2% to just above $93 per barrel and US crude futures dropping 2.8% to near $90. Despite the downward trend in crude, Treasury yields surged, reaching 4.54% on the 10-year benchmark. This inversion highlights the market’s focus on inflation risks, as traders expect higher rates to curb spending and stabilize prices. The correlation between oil and Treasury yields has been a consistent theme, with yields rising when oil prices climb and falling when they decline. However, this Friday’s divergence signaled a shift in priorities, with investors prioritizing the jobs report over energy sector dynamics.

Market Sentiment Holds Neutral Amid Uncertainty

CNN’s Fear and Greed Index, a gauge of investor sentiment, remained in the “neutral” category, having exited the “greed” phase earlier this week. The index had been in a bullish state since April 15, when the S&P 500 hit a record high amid the Iran conflict. The recent downturn suggests investors are becoming cautious, weighing the potential for rate hikes against the resilience of the labor market.

Analysts warn that the market’s volatility is likely to persist as the Fed tightens its stance. The combination of strong jobs data and AI sector weakness has created a perfect storm, with traders adjusting their strategies in response. While some may view the current environment as a temporary correction, others caution that it could signal a longer-term shift in investor confidence.

As the week draws to a close, the market’s direction remains unclear. The Nasdaq’s three-day decline and the S&P 500’s weekly loss underscore the fragility of the recent rally, while the Fed’s potential rate hike looms as a key risk factor. The coming weeks will be crucial in determining whether the market’s current slump is a precursor to a broader correction or a temporary setback in an otherwise bullish trend.