Antonio Griffin
A tech stock selloff extended into a second straight session Tuesday, with investors growing skeptical that artificial intelligence spending will produce the profits embedded in current valuations. The Nasdaq Composite dropped 523 points, or 2%, to 25,643, building on a 1.3% loss from Monday.
At a Glance
- Nasdaq fell 2% Tuesday; the S&P 500 dropped 1.3%; the Dow slipped less than 0.1%
- Meta Platforms and Microsoft have entered bear market territory, each down more than 20% from recent peaks
- South Korea's Kospi plunged 10% as the rout went global
- Only about 3% of Bank of America customers currently pay for AI services, spending a median of $20 per month
- Traders now price in nearly a 90% chance the Fed raises rates at least once before year end
Two Days of Losses, No Single Catalyst
James Reilly, senior market economist at Capital Economics, described Tuesday's declines as telling. Writing to clients, he said the drops illustrate rising volatility driven by what he called "frothy earnings expectations and/or valuations." Crucially, there was no single news event to pin the selling on, which made the move feel more structural than reactive.
Reilly flagged a specific concern about semiconductors. Meta Platforms and Microsoft have already slipped into bear market territory. If chipmakers, now the market's leading sector, begin to crack as well, he warned, the broader stock market would face serious trouble.
The AI Monetization Problem
For much of the past two years, Wall Street treated every dollar companies poured into AI infrastructure as a near-certain future profit. That assumption is now being tested. Tools like OpenAI's ChatGPT and Anthropic's Claude have attracted enormous consumer audiences, but the vast majority of those users pay nothing.
New figures from the Bank of America Institute put a number on the gap. Only around 3% of the bank's customers pay for AI services at all, and that group skews heavily toward households earning more than $125,000 a year. Those paying customers spend a median of $20 a month. The institute did note that the number of households subscribing to AI services has jumped 38% since 2024, and it projects the U.S. market could reach $75 billion annually as higher tier subscription plans emerge and more consumers pay for convenience and time saving tools.
Nigel Green, CEO of the financial consultancy deVere Group, framed the investor mood plainly: "For a long time, the market treated AI spending as unquestionably positive. Investors are now becoming more demanding. They want evidence that unprecedented spending will translate into unprecedented profits."
SpaceX Bounces, Broader Tech Slips
SpaceX offered a partial bright spot. Shares rose $8.81, or 5.7%, to $163.41 after plunging 16% Monday. The stock had surged past $200 shortly after the company's initial public offering earlier this month, but has since retreated as investors question whether a valuation above $2 trillion is supportable.
Elsewhere in tech, Nvidia fell 2.8% during midday trading and Broadcom dropped 2.3%. Alphabet, one of the Magnificent Seven megacaps, shed 1.1%. The selling also crossed borders: South Korea's Kospi tumbled 10% to 8,203.84, compounded by concerns about regulatory scrutiny in the country's semiconductor industry. Bret Kenwell, a U.S. investment and options analyst at eToro, told CBS News that global tech weakness is feeding back into U.S. markets.
Rate Hike Fears Add to the Pressure
Anxiety about interest rates is layering onto the AI skepticism. The Federal Reserve's rate-setting committee last week left open the possibility of raising borrowing costs in 2026, citing inflation driven by months of rising oil prices tied to the war in Iran. Economists expect a government report due Thursday to show consumer inflation accelerated to 4.1% in May, up from 3.8% in April.
Markets have repriced accordingly. Traders now assign nearly a 90% probability to at least one Fed rate increase before year end, according to CME Group data. A week ago, that figure stood at 57%.
Frequently Asked Questions
What pushed tech stocks lower Tuesday?
There was no single trigger. Analysts pointed to a combination of stretched valuations, thin evidence that AI spending is generating profits, and growing concern about potential Federal Reserve rate hikes later this year.
Are Meta and Microsoft in a bear market?
Yes. Both companies' shares have fallen more than 20% from their most recent peaks, meeting the standard definition of a bear market for individual stocks.
How many people actually pay for AI tools?
Based on Bank of America Institute data, roughly 3% of the bank's customers pay for AI services. Most AI tool users rely on free tiers offered by providers like OpenAI and Anthropic.
What are traders expecting the Fed to do with rates?
CME Group data shows traders pricing in nearly a 90% chance of at least one rate increase by the end of the year, a sharp jump from 57% just one week earlier.
What Comes Next for Tech Investors
The shift playing out in markets is less a crash than a recalibration. Green put it concisely: investors are now demanding proof instead of promises. Whether semiconductor stocks can hold their ground may be the clearest signal of where the broader market heads from here.
