Key Takeaways:
The S&P 500's AI-driven rally is unraveling as a two-week selloff in technology stocks pushes the benchmark 3.5% below its year-to-date high and drives the biggest rotation into defensive sectors this year.
The S&P 500 fell 3.5% from its year-to-date peak to 7,354 as a broadening rout in AI stocks triggered the largest rotation into defensive sectors this year. The tech-heavy Nasdaq Composite dropped 4.6% for the week, its second-worst weekly loss in the past year, while the Dow Jones Industrial Average eked out a 0.6% gain.
"The impact of AI is spreading, but if we exclude AI and energy, we project U.S. earnings will grow at a moderate 8% this year," Paul Quinsee, a portfolio manager at JPMorgan Chase, wrote in a note. "This shows the critical role the massive AI investment boom now plays in the outlook for equity returns."
Healthcare surged 7% for the week, the best performance among the 11 S&P 500 sectors, while real estate and utilities each added about 3.5%. On the losing side, the communication services sector dropped 5.5%, technology fell 5.2% and consumer discretionary declined 3%. Nearly two out of every three stocks in the S&P 500 rose on Friday, but the index's largest components — many tied to AI — dragged the benchmark lower.
The rotation threatens to deepen if AI earnings fail to justify valuations that had pushed the S&P 500's forward price-to-earnings ratio to 22 at the start of the year, a level exceeded only during the dot-com bubble and the pandemic era. With the Federal Reserve signaling no rate cuts this year and new tariffs set to take effect in late July, the second half of 2026 presents a gauntlet of headwinds for the market's most crowded trade.
Tech selloff deepens on IPO jitters
The selloff accelerated this week after OpenAI, the startup behind ChatGPT, signaled it may delay its initial public offering until next year, citing volatility in newly listed AI-related stocks. SpaceX, which debuted on June 12 at $135 a share, briefly surged above $225 before falling back to around $156 — roughly 30% below its peak. The New York Times reported that OpenAI's board is watching the post-IPO performance of AI names with caution.
Memory-chip stocks were hit particularly hard Friday. Western Digital dropped 13%, Seagate Technology fell 12% and Sandisk shed 10%, even after Micron reported another blockbuster quarter. Micron itself declined 7%. The moves came after Apple raised prices on laptops and other products to offset rising memory costs, stoking fears that higher input prices could eventually dampen demand.
Defensive rotation accelerates
The 10-year Treasury yield fell to 4.37% as investors sought safety, while Brent crude slid 3.8% to $72.60 a barrel — below its pre-Iran-conflict level. Gold rose nearly 1% to $4,080 a troy ounce. The Cboe Volatility Index crept higher as options traders priced in greater uncertainty around AI-sector earnings, though it remained below levels typically associated with panic selling.
Wall Street's median year-end target for the S&P 500 stands at 7,850, implying about 7% upside from current levels, according to a survey of 19 investment banks and research firms compiled by FactSet. But strategists caution that the index has missed those targets by an average of 16 percentage points over the past four years. The most bearish forecast, from Bank of America at 7,100, suggests a further 3.5% decline if the AI selloff broadens into a full correction.
This article is for informational purposes only and does not constitute investment advice.
