Wall Street Suffers Steep Decline as AI Stocks Slip and Fed Rate-Cut Expectations Fade

Wall Street Slides Amid AI Sell-Off and Interest Rate Doubts

U.S. stocks recorded one of their sharpest declines since April on Thursday as a downturn in major artificial intelligence companies and renewed uncertainty over Federal Reserve policy weighed heavily on investor sentiment. The pullback broke a weeks-long period of market gains driven by optimism around technology stocks and expectations of additional interest rate relief.

The sell-off affected nearly every major sector, with investors grappling with questions about whether the strong gains in AI heavyweights can continue and whether the Fed will proceed with another rate cut before the end of the year.

AI Stocks Lead Broad Market Declines

Major AI-linked companies once again came under pressure, reversing months of strong momentum. Nvidia, one of the leading drivers of the sector’s rally, dropped 3.6% and exerted the heaviest drag on the broader market. The downturn extended to other high-profile AI beneficiaries, including Super Micro Computer, which fell 7.4%, Palantir Technologies, which slipped 6.5%, and Broadcom, which lost 4.3%.

Stretched valuations raise investor caution

Analysts have warned for weeks that the rapid rise in AI-related stocks could prompt volatility. Palantir, for example, had gained nearly 174% earlier in the year, reinforcing concerns that valuations may be rising faster than underlying performance. The dramatic upswing has invited comparisons to the dot-com boom of the late 1990s, which ended in a significant market correction that cut the S&P 500 by almost half.

Despite those concerns, AI has remained one of the primary engines behind the U.S. equity market’s record-setting performance this year, even as the labor market shows signs of cooling and inflation pressures remain elevated.

Fed Uncertainty Weighs on Market Confidence

Traders were also unsettled by growing doubts surrounding another Federal Reserve rate cut in December. Pricing from CME Group data showed expectations slipping to just above 51%—down from nearly 70% a week earlier.

Lower interest rates generally support stock prices by reducing borrowing costs and stimulating economic activity. However, Fed officials have cautioned that slowing inflation must be balanced against signs of a cooling job market.

Recent Fed commentary adds to the hesitation

Boston Federal Reserve President Susan Collins said it may be appropriate to keep rates steady “for some time,” reversing her previous support for an additional cut only weeks earlier. The Fed’s decision-making process has also been complicated by the recent U.S. government shutdown, which delayed crucial economic data releases. Without timely information, policymakers are left navigating uncertainty over whether inflation or weakening employment poses the bigger risk.

Economists warn that the upcoming wave of delayed government data could trigger further volatility as the central bank reassesses its policy trajectory. Doug Beath, global equity strategist at Wells Fargo Investment Institute, said a “looming data deluge may spur additional volatility in the coming weeks.”

Earnings Results Add Pressure Across Sectors

Corporate performance influenced market movements as well. The Walt Disney Co. fell 7.7% after reporting quarterly revenue below market expectations, despite posting stronger-than-anticipated profit. The revenue miss overshadowed gains in its streaming and entertainment divisions.

In contrast, Cisco Systems jumped 4.6% after delivering better-than-expected results on both profit and revenue, offering a rare bright spot amid the day’s declines. Berkshire Hathaway also rose 2.1%, supported by confidence in Warren Buffett’s value-driven investment approach.

By the close of trading, the S&P 500 had fallen 113.43 points to 6,737.49. The Dow Jones Industrial Average slid 797.60 points to 47,457.22, and the Nasdaq composite dropped 536.10 points to 22,870.36.

Global Markets and Bond Yields Reflect Caution

U.S. Treasury yields climbed as investors moved away from equities. The yield on the 10-year Treasury increased to 4.12%, up from 4.08% the previous day, placing further pressure on equity valuations.

International markets reflected similar caution, with European indexes slipping throughout the day. In Asia, Tokyo’s Nikkei 225 rose 0.4%, although Japanese conglomerate SoftBank declined another 3.4% following its announcement that it had sold its entire $5.8 billion stake in Nvidia.

Bitcoin also continued its retreat, dropping back below $99,000 after nearing $125,000 last month.