U.S. Technology Stocks Endure Consecutive Sell‐Offs as Wall Street Questions the Durability of the AI Rally

Over the last two trading sessions, U.S. technology shares have experienced a sharp pullback, reversing the robust rally that characterized much of the past quarter. This correction underscores the vulnerability inherent in strategies driven predominantly by artificial intelligence themes.

On Wednesday, the Nasdaq Composite Index—which is heavily weighted toward technology companies—posted its second straight daily decline and has fallen roughly 2% for the week. Semiconductor heavyweight NVIDIA saw its share price drop 3.5% on Tuesday, erasing more than USD 155 billion in market value. Palantir Technologies endured its longest losing streak since April 2024, tumbling for six consecutive days and wiping out approximately USD 73 billion in capitalization.

Prior to this downturn, technology stocks had surged more than 50% from their April lows through last week—easily outperforming the S&P 500’s 29% advance over the same span and driving tech valuations to multi-year highs. Many market participants now view that rebound as overextended, with profit-taking and risk-rebalancing emerging as logical responses to such elevated levels.

Investors suggest that the AI-driven upswing has outpaced fundamentals. NVIDIA’s stock is up around 30% year-to-date, while Palantir has roughly doubled in value. According to Datastream, the sector’s forward price-to-earnings multiple stands near 30 times—its loftiest reading in a year—and technology’s share of the S&P 500 market cap is approaching levels last seen in 2000.

Further cautionary signals have surfaced, including an MIT study reporting that 95% of organizations have yet to realize returns on their AI investments, and comments from OpenAI CEO Sam Altman warning of excessive investor exuberance. Although several AI-linked names have plunged in recent days, some strategists contend that this adjustment merely reflects near-term positioning rather than a wholesale retreat from AI opportunities.

Sentiment has also been tempered by the upcoming central bank gathering in Jackson Hole, where Federal Reserve Chair Jerome Powell is scheduled to speak. Federal funds futures as of Wednesday imply an 84% probability of a 25-basis-point rate cut at the Fed’s September meeting, heightening the stakes for Powell’s remarks. “When a market gets this crowded and momentum-driven, pullbacks are inevitable,” observes Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services.

Investors will scrutinize any hints from Powell about future monetary easing or a willingness to resist calls for looser policy. Technology stocks, which trade at lofty valuations, are particularly sensitive to shifts in interest-rate expectations. “A lot of portfolios are heavily weighted in tech, and they don’t want to get caught offside,” notes Chuck Carlson, CEO of Horizon Investment Services. “They’ll trim exposure rather than exit completely.”

Seasonal factors may also be contributing to the rotation out of high-beta names. Historically, August and September have delivered the weakest S&P 500 returns over the past 35 years, prompting many money managers to lock in gains and reduce equity risk during this period. “Valuations are stretched, and certain companies need a breather,” says King Lip, Chief Strategist at Baker Avenue Wealth Management, “the market is entering a more challenging seasonal phase.”