Nasdaq and S&P 500 record worst session of the year with pressure from the AI sector

Investors sold stocks, bonds, bitcoins and gold on Friday (5), after solid labor market data increased the chances of interest rate hikes by the Federal Reserve, while Wall Street faced the decline in the value of shares in the artificial intelligence sector.

The S&P 500 fell 2.64%, its worst day since October. The index closed in the red for the week and interrupted a nine-week streak of gains. The Nasdaq Composite, with a strong presence of technology companies, fell 4.18%, its worst day since April 2025.

The Dow Jones, which has less exposure to the technology sector, fell 695 points, or 1.35%, its worst day in about three months.

Volatility in markets increased this week as investors took profits from recent stock rallies and assimilated changing expectations regarding the Fed's interest rates. Wall Street's fear gauge, the VIX, rose 40% to its highest level in two months.

The economy created 172 thousand jobs in May, exceeding expectations, according to data released this Friday by the Department of Labor Statistics. The sharp increase in employment comes after recent data showed that inflation was rising due to the rise in oil prices caused by the war with Iran.

A strong job market could cause the Fed to prioritize inflation, increasing the chances of an interest rate increase later this year. Traders estimate a 43% probability that the Fed will raise its benchmark interest rate in December, up from 26% a month ago, according to CME FedWatch.

The strong increase in the number of jobs is good news for the economy. But for markets, it's a different story, as this could mean higher interest rates for longer.

"In the near term, the data confirms that Fed easing is off the table this year, and markets remain concerned that the next move could be a hike," said James McCann, senior investment strategy economist at Edward Jones, in a note.

Treasury bond rates, which rise when bond prices fall, posted a jump. The 10-year rate, which influences mortgage rates, rose to 4.54%. Rising Treasury bond rates could put pressure on stocks.

In yet another sign of the risk-averse climate, bitcoin plunged more than 5% and fell below US$60,000, reaching its lowest level since October 2024. The cryptocurrency registered a drop of more than 17% this week, after Strategy, a major company in the sector, revealed that it had sold part of its bitcoin stock for the first time since 2022.

Bitcoin is down more than 50% since hitting its all-time high in October.

After a nine-day rising streak, the Nasdaq fell for the third day in a row, pressured by a wave of selling in semiconductor chip stocks. After a huge rally in recent weeks, AI-related stocks have retreated: A popular exchange-traded fund that tracks memory chip stocks sank 15%.

Broadcom this week released a lower-than-expected third-quarter chip revenue forecast. This sent shares down 12.59% on Thursday and 7.92% on Friday, highlighting the cautious mood surrounding AI.

"A parabolic move like what most of these stocks have been experiencing is not sustainable over the long term," said Ross Mayfield, investment strategist at Baird.

"The market is basically pricing in perfection, and I think Broadcom's results, along with the somewhat disappointing guidance, are an example of that," Mayfield said. "It doesn't take much to trigger a reversal."

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Tech stocks extended losses in the afternoon after Meta fell 5.5% on reports the company was looking to raise capital to fund its expansion into artificial intelligence.

Gold prices also fell more than 3.5%, effectively erasing this year's gains. Higher interest rates can make assets like gold, which do not generate income, less attractive.

Edward Jones' McCann said the bar for rate hikes remains high and that there would need to be signs of a "more persistent rise in inflation" for the Fed to move toward a monetary tightening cycle.

"However, new Fed Chairman Kevin Warsh will have to strike a delicate balance in his first meeting, given the complex balancing act Fed policy currently faces and the well-documented divisions within the FOMC (Federal Open Market Committee), which is responsible for setting rates," McCann added.

CNN's Fear and Greed Index, an indicator of market sentiment, fell into the "fear" zone, a sudden change from recent weeks. The F&G Index had been in the "greed" zone since April 15, when the S&P 500 hit its first record during the war with Iran.

Oil prices fell on Friday: Brent crude futures fell about 2% to just above $93 per barrel.

Treasury bond rates have closely tracked oil prices in recent weeks, rising on fears about inflation when oil rises - and falling when oil falls. But that changed on Friday.

Treasury rates rose despite falling oil prices, signaling that traders are focusing on positive labor market data and possible labor market stabilization, which could increase the Fed's focus on inflation.

"Markets have spent months looking for a reason for the Federal Reserve to cut rates. Today's jobs report gave policymakers a reason not to," said Nigel Green, CEO of deVere Group, in a note.

"A report doesn't set policy, but a report of this magnitude changes the odds," Green said. "And the markets recognized that immediately."

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Source: CNN