Key insights
- The AI stock rally faltered due to a stronger-than-expected US jobs report, increasing fears of prolonged high interest rates. This negatively impacts growth stocks like those in AI, as higher discount rates reduce the present value of future earnings. While some AI stocks saw individual boosts earlier, broader market concerns about inflation and Fed policy are now weighing on the sector, suggesting a potential pullback.
Many tech stocks fell on Friday, as the artificial intelligence (AI)-fueled rally ran out of steam.
Here's how some of the top AI stocks fared today:
The downturn appears to have been sparked by a strong jobs report that stoked fears of interest rate hikes.
Many investors were hoping that the conflict in the Middle East would be resolved, energy prices would fall, inflation would subside, and the Federal Reserve would be free to cut interest rates.
Those hopes were dashed on Friday after job growth in May was much stronger than expected, with U.S. nonfarm payrolls rising to a seasonally adjusted 172,000 versus a consensus analyst estimate of 80,000.
While positive for job seekers, the report makes it harder for the Federal Reserve to justify rate cuts. Reducing interest rates when unemployment is already low can stoke inflation and overheat the economy.
Growth stocks are particularly sensitive to interest rate movements, as a higher portion of their value is derived from their future profits. When interest rates rise, investors discount those projected earnings at a higher rate, thereby viewing them as less valuable today.
Evidence was mounting that AI stocks were due for a pullback even before the jobs report was released.
A few sentences from Nvidia CEO Jensen Huang were all that it took to drive semiconductor giant Marvell up more than 30% in a single day earlier this week.
Yet at the same time, Alphabet's $80 billion equity offering reminded investors that AI-driven growth comes at a steep cost, while Broadcom's quarterly report showed that even a leading AI chipmaker could fail to meet Wall Street's sky-high demands.