The U.S. stock market experienced a significant downturn Friday, marking a departure from its recent record highs and joining a broader global decline. This pullback was largely attributed to surging oil prices, which triggered concerns throughout the bond market. Shares of companies that had benefited from enthusiasm surrounding artificial intelligence (AI) technology led the losses.
As of midday, the S&P 500 dropped 1.1% from its record high set the previous day. The Dow Jones Industrial Average faced a decline of 518 points, equating to a 1% decrease, while the Nasdaq composite fell 1.4% from its respective peak. The sharp drop in technology stocks marked a striking reversal from their earlier exponential growth this year, which had propelled global markets to new heights but sparked criticism about overheating in valuations.
Key players in the AI sector felt the impact notably. Nvidia, recognized as a leading figure in the AI boom, saw its stock dip by 3.3%, making it the largest drag on the S&P 500. Coming into the day, Nvidia had already accomplished a remarkable 26% gain for the year. Similarly, Applied Materials experienced a modest decline of 0.7%, despite reporting stronger-than-expected profit growth attributed to the worldwide demand for AI-related technology. The company, which supports chip and display manufacturing, had previously enjoyed a staggering 70% increase in stock value this year.
Market analysts, including Brian Jacobsen, chief economic strategist at Annex Wealth Management, voiced concerns over the current state of the market. He noted that while robust corporate profits and a resilient U.S. economy are maintaining stock prices, the market appears to be in overbought territory, suggesting that investors should exercise caution rather than hope for continued gains.
Rising oil prices have further fueled market anxiety, exacerbating inflation concerns beyond earlier predictions. Hostilities in the ongoing conflict with Iran have disrupted oil tanker shipments through the key Strait of Hormuz, leading to a 3.8% increase in Brent crude oil prices, which rose to $109.74 per barrel. This figure stands in stark contrast to about $70 per barrel prior to the conflict.
Despite many U.S. companies reporting that consumers continued to spend despite higher gasoline prices, surveys indicate growing pessimism among U.S. households regarding the economy. Concerns about the war and tariffs are contributing to a sense of unease.
This anxiety was mirrored in the bond market, with Treasury yields rising sharply. The yield on the 10-year Treasury climbed to 4.58%, up from 4.47% late Thursday. This increase marks a significant jump, well above the 3.97% yield seen prior to the onset of the war. The yield on the 30-year Treasury is nearing its highest level for 2023 after surpassing 5%.
Higher yields typically mean increased borrowing costs for mortgages and other loans, which can dampen economic growth and negatively impact stock prices across various sectors. Smaller companies were hit particularly hard, as many rely on borrowing to fund their growth, making them more vulnerable to rising interest rates. The Russell 2000 index, comprised of the smallest U.S. stocks, fell 2.4%, more than double the S&P 500’s declines.
The increase in yields has been tied to fears of rising inflation and the potential impact on the Federal Reserve’s monetary policy. Expectations that the Fed might resume interest rate cuts have dissipated, with traders even beginning to bet on possible rate hikes in 2026.
In the broader global context, markets in Europe and Asia mirrored the decline, with South Korea’s Kospi seeing a staggering drop of 6.1%. This index had previously been on the rise, buoyed by companies like SK Hynix, which are benefiting from the AI trend, but momentum quickly reversed after briefly surpassing the 8,000 mark.
Market analysts have issued warnings about a potential shift in momentum for technology stocks and AI beneficiaries. “If nothing else, this should be a ‘shot across the bow’ for how volatility works both ways,” commented Jonathan Krinsky, chief market technician at BTIG.
