Sinking AI stocks knock Wall Street off its records as markets drop worldwide on inflation worries

U.S. stock markets retreated from record highs on Friday as AI-driven stocks led a broad sell-off, fueled by inflation worries and surging oil prices. The S&P 500 fell 1.2%, the Dow Jones lost 426 points (0.9%), and the Nasdaq dropped 1.8% from its own record, reversing earlier gains. Nvidia, a key AI stock, fell 4.5% after a 26% year-to-date rise, while Applied Materials dropped 2.3% despite strong quarterly profits tied to AI chip demand. Higher oil prices intensified concerns, with Brent crude rising 2.7% to $108.57 as tensions in the Strait of Hormuz disrupted global supply. Rising Treasury yields—10-year yields climbed to 4.57%—reflected fears of prolonged inflation and delayed Federal Reserve rate cuts, with some traders now betting on rate hikes in 2026. Smaller stocks, like those in the Russell 2000 index, fell 2.3% as higher borrowing costs weighed on growth plans. The bond market’s shift signaled broader economic unease, with stronger-than-expected U.S. industrial production and New York manufacturing data adding to inflation pressures. Analysts warned markets may have entered overbought territory, though corporate profits and economic fundamentals remain strong. Meanwhile, global markets followed suit, with European and Asian indexes also declining sharply. The sell-off highlighted vulnerabilities in AI-driven valuations, as stocks that surged on hype faced correction amid macroeconomic risks. Rising yields could further dampen stock prices and increase borrowing costs for businesses and households. Investors now face a more uncertain path, with inflation and geopolitical tensions overshadowing near-term optimism.