Tech stocks spooked by US inflation at 3-year high

The highest US inflation read in three years today put ARM Holdings  ADR (NASDAQ:ARM) and other tech stocks under more selling pressure as Wall Street continued to bet on a 2026 interest rate rise.

The consumer prices index lifted to 4.2% from 3.8% in April, driven by the energy price shock of the Middle East war and a run of three consecutive stronger-than-expected jobs reports.

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

The latest figure met expectations, which limited the downside for the Nasdaq 100 and S&P 500 index after the leading benchmarks fell sharply on Friday and during yesterday’s session.

Wall Street’s attention now turns to next week’s Federal Reserve policy meeting and whether new chair Kevin Warsh signals a shift away from the central bank’s easing bias.

Markets are now fully priced for a quarter-point hike by the end of this year, which represents a setback for the tech sector as higher rates lower the current value of future profits.

Anxiety over elevated valuations and uncertainties over the monetisation of AI have also weighed on sentiment after a strong run for US markets in the months of April and May.

The Philadelphia Semiconductor Index is still up by more than 70% even after the recent wobble, with the Nasdaq 100 and S&P 500 index 15% and 8% higher so far this year.

• Has tech sector sell-off called top of the market?
• AI boom or bubble? How to navigate risks and opportunities
• Iran war 100 days: how stocks and markets have performed

Cambridge-based chip designer Arm Holdings has been the worst-performing Nasdaq 100 stock since 2 June, having fallen by 19%, and by as much as 25% at one point in Tuesday’s session. However, it has still tripled in value this year.

Broadcom Inc (NASDAQ:AVGO) is down by a similar level after last week’s quarterly results failed to include an upgrade on current guidance for $100 billion-plus (£75 billion) of AI revenues in the 2027 financial year. Other heavy fallers included Microsoft Corp (NASDAQ:MSFT) after a drop of 9% in the past week.

UBS Global Wealth Management expects today’s CPI data to represent the high-water mark for headline inflation.

It told clients this morning: “While data-centre demand has been spilling into consumer tech prices, our view is that the boost from higher tariffs is fading.

“With no evidence of accelerating wage pressures, second-round effects from higher energy prices should remain contained. As this becomes clearer later in the year, we expect a more dovish turn from Fed policymakers.”

While the path towards a resolution in the Middle East is likely to be uneven, the bank’s base case is that diplomacy ultimately prevails, and that this will allow investors to refocus on resilient economic fundamentals and robust earnings growth in both the US and Europe.

• Why Broadcom crash could be buying opportunity
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• eyeQ: watch for green light on S&P 500 trade

However, Bank of America analysis of trading flows today showed that clients last week sold stocks in eight of 11 US sectors, led by the largest tech outflows since records began in 2008.

Charu Chanana, chief investment strategist at Saxo, said the recent sell-off of AI stocks looked more like a reset within a bull market than the start of a broader bear-market shift.

She said: “The usual warning signs - recession stress, disorderly yields, extreme oil prices or a broad earnings collapse - are not clearly visible yet.

“The easy phase of the AI rally is likely over. The market has moved from rerating to proof, which means AI-linked companies now need to show clearer monetisation, earnings delivery, capital expenditure discipline and returns on infrastructure spend.

“This is not a uniform risk-off move yet. The pressure is concentrated in crowded AI and tech winners, while defensives, value areas and laggards are still finding buyers. That makes breadth and rotation important signals to watch.”