Investing.com — Wall Street on Friday snapped a two-week winning run, driven mainly by a slide in technology stocks as the high-flying artificial intelligence trade continued to unwind, sending chip names into bear market territory. Sentiment also took a hit as escalating U.S.-Iran tensions boosted oil prices, leading to a resurgence in inflationary concerns.
The S&P 500 Technology sector slumped more than 3% initially after the opening bell, amid jitters over Chinese competition after the launch of a powerful new AI model and a post-earnings decline in streaming giant . That slump weighed on the tech-heavy , sending it down as much as 2.4%. Tech stocks pared a chunk of their losses after that through the day, but the sector ended as the biggest loser of the week.
The Nasdaq eventually slid 1.4% to close at 25,520.24 points. The benchmark S&P 500 index shed 1.1% to settle at 7,454.74 points, while the blue-chip dipped 0.8% to conclude at 52,146.39 points. For the week, the Nasdaq was down 2.9%, the S&P 1.6%, and the Dow 0.9%.
Positive indicators on consumer sentiment and inflation expectations shortly after the start of trading had helped lift the mood and stem the opening rout. Economic data released earlier this week pointed to a moderation in the U.S. consumer price index (CPI) and producer price index (PPI) in June, but the renewed fighting between Washington and Tehran and the subsequent spike in crude prices has refueled inflation jitters.
“It’s interesting to see how little effect the excellent inflation reports had on stocks. CPI and PPI were both very pleasant surprises, but although they caused Fed Funds futures to largely price out a near-term rate hike, that didn’t have a major effect on stocks. Earnings, and to some extent geopolitics, should be the most important factors in the coming weeks,” Steve Sosnick, chief strategist at Interactive Brokers, told Investing.com.
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Moonshot casts ripples, Meta’s bumper computing deal
The AI space has seen some notable developments this week, from a historic single-day crash in ’s stock to stellar quarterly results from chipmaking majors such as Taiwan Semiconductor Manufacturing and Dutch firm . On Friday, China grabbed the spotlight.
Moonshot AI, a Beijing-based startup developing generative AI and large language models (LLMs), unveiled its Kimi K3 model, a gargantuan 2.8-trillion-parameter system that it said rivaled U.S. models such as those from Amazon and Alphabet-backed Anthropic and Microsoft-backed OpenAI.
“K3 has received positive feedback globally, signaling an all-round catch-up of Chinese LLMs with US leaders in model size, performance, and pricing. K3, the largest open-weight Chinese LLM so far, may suggest the scaling law still holds … We do not view K3 as an overnight miracle but rather as the result of cumulative progress across China’s AI model industry,” Morgan Stanley analyst Gary Yu said.
The Kimi launch sparked the initial rout in U.S. futures and at the opening bell, with Magnificent Seven members sliding and most chipmakers, which have become essential to the AI boom, also slumping. On the other hand, memory stocks gained.
“The Moonshot Kimi narrative has evolved a tiny bit in the last few hours – what was initially considered a broad negative for all of tech (i.e. another ’DeepSeek moment’) is now looked at through a more nuanced lens,” Vital Knowledge’s Adam Crisafulli said.
“Kimi is quite a large model which means running it would in theory require a lot of compute (thus the rebound in stocks like , , , , etc., from their pre-market lows), although it certainly creates market share headwinds for OpenAI and Anthropic (which in turn has huge implications for many hyperscalers and neoclouds, most of which are bringing capacity online for the express purpose of accommodating one or both of those frontier labs),” he added.
Tech stocks recovered later, partly due to a New York Times report that said was in early talks to lease its vast AI data centers to Anthropic in a blockbuster $10 billion deal, citing three people with knowledge of the discussions. The Facebook-parent’s stock sharply pared losses on the news, finally finishing 2.8% lower.
Chip stocks slide into bear market territory
A furious rally in the AI trade earlier this year played a key role in helping Wall Street shake off the Middle East conflict and return to record levels. But a bout of profit-taking has hit the space since last month, amid rising concerns over massive capital sending on the technology and soaring prices for products such as memory chips that power AI processing.
Another major benefactor of the AI boom was the South Korean equity market, as the market capitalization of memory chipmakers and swelled above $1 trillion each. The Asian nation’s flagship stock index, the , hit an all-time high in June, at which point it had rocketed a whopping 122.7% YTD. Since then, the gauge has slumped 25.2% from its record close, marking a fall into bear market territory.
Worries over AI-inflated valuations have also dampened blowout quarterly results from key names such as Taiwan Semiconductor Manufacturing (), the world’s largest contract chipmaker, and Dutch lithography leader ASML.
“Investors continue to debate whether AI-related companies can justify their lofty valuations. While earnings and demand trends remain strong, recent profit-taking suggests some market participants are questioning how long the current pace of growth can continue. The question now is whether this will become yet another ’buy the dip’ opportunity, or if the pace of selling accelerates as everyone rushes to the exit doors at the same time,” David Morrison, senior market analyst at Trade Nation, said.
Friday’s losses in the – a key a barometer for chip stocks – was enough to push it into bear market territory, which happens when a gauge ends 20% below its most recent record close.
Netflix drops on disappointing forecast
Away from AI-related stocks, the tech sector was also weighed down by a post-earnings decline in Netflix. The streaming giant issued current quarter revenue and profit guidance that missed Wall Street estimates, stoking concerns about its growth strategy.
“Netflix’s latest quarterly numbers had investors reaching for the remote as its forward guidance raised fresh concerns about the company’s growth prospects,” Russ Mould, investment director at AJ Bell, said.
“Second-quarter numbers more or less hit expectations but the third-quarter forecast implies the weakest revenue growth in three years and just feeds into concerns about competition and the long-term strategy following its failed attempt to buy Warner Bros Discovery,” he said.
“Netflix disappointments are on their way to becoming a regular series rather than just a one-off event – with this latest let-down following hot on the heels of poorly received first-quarter numbers,” Mould added.
U.S. consumer sentiment hits highest level since February
Turning to Friday’s economic calendar, data from the University of Michigan shortly after the opening bell lifted spirits. Its preliminary reading on U.S. consumer sentiment ticked up to 54.4 in July, a 9.9% rise from June and the highest reading since February, largely due to easing price pressures at the gasoline pump. Consumers’ year-ahead inflation expectations slipped to 4.2% in July from 4.6% in June.
The report was another in a set of positive indicators this week. Notably, U.S. consumer and producer prices moderated on a monthly basis in June, while gasoline station retail sales fell, largely due to a slide in global oil prices after Washington and Iran inked an interim peace deal.
Inflationary dynamics have rapidly shifted this month, however, amid the biggest escalation in tensions between the two sides since they signed the agreement. Dallas Fed President Lorie Logan on Thursday called for “modestly higher” interest rates.
“There is no conflict in our mandate. Inflation is too high. The labor market is right around my level of maximum employment,” Cleveland Fed President Beth Hammack said on Friday, adding “persistently high inflation is the bigger concern.”
“For the first time in my tenure, I’m hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can’t make ends meet about a growing sense of despair,” she added.
Iran tensions in focus
Looking at the Middle East, the U.S. kept up its bombardment of Iran, completing a latest major wave of strikes against the country for a sixth consecutive night. The U.S. military on Friday said it had successfully destroyed a port surveillance tower that that Iran had “used for decades” to track and target commercial vehicles transiting the Strait of Hormuz.
Meanwhile, an Axios report said that Washington had notified Israel it was sending dozens more refueling planes to the country ahead of a potential expansion of military operations against Iran, citing three U.S. and Israeli officials. President Donald Trump earlier this week vowed further attacks on Iranian infrastructure if Tehran did not come to the negotiating table.
Ambar Warrick and Scott Kanowsky contributed to this article