US equity futures plunged on Tuesday as investors reassessed the sustainability of the artificial intelligence rally in the face of renewed expectations for Federal Reserve interest rate hikes. Nasdaq 100 futures led the decline with a 2.42% drop, while S&P 500 futures fell 1.33% and Dow futures lost 319 points (0.61%), extending losses that began during Monday's mixed session.
Tech weakness drags broader market
Megacap technology stocks, which had been the primary drivers of recent gains, are now under scrutiny. Alphabet fell 5% on Monday amid concerns over AI talent departures, while Amazon, Meta, and Microsoft each recorded significant losses. SpaceX — which recently launched a debt offering after disclosing it held roughly $100.8 billion in cash — tumbled 14%, prompting questions about how companies are financing expensive AI infrastructure. The selloff signals that investors are moving from a focus on revenue growth to balance-sheet resilience as borrowing costs climb.
Fed rate hike bets return to the forefront
Market pricing now assigns a high probability to a 25-basis-point rate hike as early as September, and traders increasingly expect a total of 50 basis points of tightening by December. This hawkish shift, influenced by Chair Kevin Warsh's emphasis on controlling inflation, has pushed two-year Treasury yields near their recent highs, intensifying pressure on long-duration growth stocks and rate-sensitive assets.
AI bellwether Micron and upcoming economic data
Amid the turbulence, semiconductor shares had shown relative strength on Monday, with the Philadelphia Semiconductor Index hitting a record. Micron Technology's quarterly results on Wednesday are now seen as a crucial test for the AI trade. Additionally, investors are bracing for Tuesday's preliminary PMI readings and Thursday's PCE inflation report — the Fed's preferred gauge. A hotter-than-expected PCE print could solidify the case for rapid rate hikes, potentially sparking further declines across equities, cryptocurrencies, and other risk assets.
Oil prices slip on Iran negotiations
Brent crude futures fell 3.31% to $77.90 a barrel, and West Texas Intermediate declined 2.32% as mediators reported progress in US-Iran talks. The US Treasury's authorization for Iranian oil sales added to downward pressure, helping offset some energy-driven inflation concerns but not enough to lift overall sentiment.
