Wall Street Ends Lower as AI Stocks Drag Markets, Fed Rate Outlook Shifts

Wall Street closed slightly lower on Friday, capping a difficult week for U.S. equities as technology stocks led the decline. With geopolitical tensions easing following diplomatic progress in the Middle East and oil prices continuing to fall, investors shifted their focus back to artificial intelligence (AI) stocks, corporate earnings, and the Federal Reserve's interest rate outlook.

The benchmark S&P 500 slipped 0.3% to finish at 7,338.39, while the Nasdaq Composite lost 0.2% to close at 25,297.62. The Dow Jones Industrial Average edged down 0.1% to 51,865.52. For the week, the S&P 500 declined 2.2%, the Nasdaq dropped 4.6%, and the Dow managed a modest 0.6% gain.

Technology shares faced heavy selling pressure, with the S&P 500 Technology sector falling more than 5% over the week. Much of the volatility centered on the global memory chip market, where soaring demand for AI applications continues to tighten supply of DRAM and High Bandwidth Memory (HBM) chips.

Investor sentiment weakened after reports suggested SK Hynix was redirecting resources toward mainstream DRAM production, sparking sharp declines in both SK Hynix and Samsung Electronics earlier in the week. Although both companies briefly rebounded following SK Hynix's announcement of a planned $29.4 billion Nasdaq listing, renewed selling on Friday pushed South Korea's KOSPI index to another steep decline.

Meanwhile, Micron Technology delivered strong quarterly earnings and optimistic guidance, sending its shares nearly 16% higher on Thursday. The company emphasized that AI-driven demand continues to outpace memory supply, reinforcing optimism for the semiconductor industry despite broader market weakness.

Market analysts noted that investors are increasingly distinguishing between winners and losers within the AI sector. While enthusiasm for AI infrastructure remains strong, concerns about elevated valuations have prompted some portfolio managers to recommend taking profits in memory-chip stocks after their substantial gains.

Technology stocks faced additional headwinds after Apple announced price increases for several products, including MacBooks and iPads, citing higher component costs driven by expensive memory chips. Investors also reacted cautiously to reports that OpenAI may postpone its anticipated initial public offering until 2027, although later reports indicated no official IPO timetable has been finalized.

Outside the technology sector, investors closely monitored U.S. economic data. The Federal Reserve's preferred inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index, matched expectations in May, with annual inflation reaching 3.4%, its highest level since late 2023. Despite elevated inflation, markets modestly reduced expectations for additional interest rate hikes this year, encouraged by declining gasoline and crude oil prices that could help ease future inflation.

Analysts at UBS suggested May could represent the peak in inflation, projecting significantly softer headline inflation in upcoming reports as lower energy prices filter through the economy.

However, Minneapolis Federal Reserve President Neel Kashkari maintained a cautious stance, saying he now expects one interest rate hike before year-end. Kashkari cited ongoing geopolitical uncertainty, tariffs, supply chain disruptions, and massive investment in AI data centers as factors keeping inflationary pressures elevated.

Adding to the economic picture, the University of Michigan reported improved consumer sentiment for June, helped by falling fuel prices. Consumers also slightly lowered their one-year inflation expectations.

Geopolitical developments remained in focus after President Donald Trump said Iran violated the recent ceasefire by launching drones at commercial shipping in the Strait of Hormuz. Despite the reported attack, oil prices continued to decline as shipping traffic through the strategic waterway remained largely uninterrupted, further reducing concerns over global energy supplies.

As markets head into the new week, investors will continue watching AI-related developments, semiconductor demand, Federal Reserve policy signals, inflation trends, and geopolitical events that could shape market direction.