Wall Street's tech-driven rally hit a wall on Tuesday, with the S&P 500 and Nasdaq closing at more than one-week lows as a sharp semiconductor selloff dragged the broader market down. The decline reflects growing investor unease over the scale of debt-funded AI spending and a Federal Reserve that's increasingly expected to turn more hawkish.

The Numbers Behind the Selloff

The Dow Jones Industrial Average fell 47.22 points, or 0.09%, to 51,665.49, the S&P 500 lost 107.32 points, or 1.44%, to 7,365.47, and the Nasdaq Composite dropped 579.56 points, or 2.21%, to 25,587.04. The pain was heavily concentrated in chip stocks: the Philadelphia SE Semiconductor index tumbled 7.9%, while the S&P 500 information technology sector index slipped 3.7%.

Individual chipmakers bore the brunt of the damage. Nvidia dropped 4.1% and Alphabet fell 1%, while chipmakers Intel, Marvell Technology, and Advanced Micro Devices lost between 5.8% and 9.4%. Volatility spiked in response: the CBOE Volatility Index, Wall Street's fear gauge, climbed 2.23 points to an over-one-week high of 19.52.

Why Investors Are Worried About AI Spending

The selloff's root cause centers on how Big Tech is financing its AI buildout. "Some of the news lately about AI raises questions about all the spending that's being done and the capex and ramping of the capacity for semiconductors," said Thomas Martin, senior portfolio manager at Globalt. Concerns over hyperscalers' debt-funded AI spending have contributed meaningfully to the selloff, with Elon Musk's SpaceX — which debuted on public markets this month — joining a growing list of megacap companies tapping the bond market to raise capital.

That dynamic has investors increasingly questioning whether the AI infrastructure boom can be sustained at its current pace without straining corporate balance sheets, particularly as financing shifts from cash-rich self-funding toward heavier reliance on debt markets.

A More Hawkish Fed Adds to the Pressure

Compounding the chip-driven anxiety is a shifting outlook on US monetary policy. Traders are increasingly betting on a second interest rate hike by the Fed by December, according to LSEG data, compared with expectations of just one 25-basis-point hike as recently as two weeks ago, as investors price in a more hawkish monetary stance under new Fed Chair Kevin Warsh. The Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, is due Thursday and could provide further clarity — or further volatility — depending on how it lands.

Money Rotated Out of Tech and Into Defensive Sectors

Not every part of the market suffered. Six of the 11 major S&P 500 sectors actually moved higher, with consumer staples rising the most at 1.8%, as investors rotated away from highly priced tech shares and into more defensive areas of the market. Declining issues outnumbered advancers by a 1.31-to-1 ratio on the NYSE, with 120 new highs and 187 new lows recorded, while on the Nasdaq, 2,181 stocks rose and 2,636 fell. Trading volume came in at 24.1 billion shares, well above the 22.53 billion average over the prior 20 sessions, reflecting the elevated activity tied to the selloff.

Geopolitics Still in the Background

Markets weren't only watching chips and the Fed. Investors also kept an eye on developments in the Middle East, after the US Senate backed legislation to halt US military action against Iran, even as it remained unclear how that vote would affect the ongoing conflict while the Trump administration continues negotiating a peace agreement with Tehran. That geopolitical backdrop adds another layer of uncertainty for a market already digesting tech-sector jitters.

For ongoing, real-time tracking of how chip stocks and broader indices are moving in response to AI capex concerns, the Reuters US Markets desk remains a leading source for continuous market coverage.

What Comes Next

With Thursday's PCE inflation data looming and the market increasingly pricing in a more aggressive Fed under Kevin Warsh, investors will be watching closely for any signs of whether this semiconductor-led selloff is a brief repricing of an overheated AI trade — or the start of a more sustained reassessment of how much debt-funded AI spending the market can absorb. Either way, chipmakers are likely to remain at the center of the volatility in the sessions ahead.