S&P 500 Retreats From Record as AI Rally Stalls on High Expectations
The benchmark index pulled back from record levels as investors reassessed lofty artificial intelligence valuations and digested disappointing consumer spending figures.
The S&P 500 retreated from record highs on Friday, closing down 13.41 points, or 0.17%, at 7,785.58. The Nasdaq Composite fell 0.28% to 26,729.16, and the Dow Jones Industrial Average dropped 108.53 points, or 0.20%, to 53,732.53.
The pullback was led by a rotation out of semiconductor stocks, even after strong earnings reports. Applied Materials, whose shares have doubled this year on data center demand, fell despite issuing an upbeat quarterly forecast. Broadcom and Intel also declined as the market reassessed valuations.
"A lot of the drivers in the market right now are around various parts of AI, and (Applied Materials) is an example of a company that had a 'beat and raise' but expectations were high and so the stock sold off," said Thomas Martin, senior portfolio manager at GLOBALT Investments. This highlights the fragile sentiment surrounding the sector's recent gains.
The broader market remains expensive, trading at roughly 20 times expected earnings. That valuation is up from 19 times at the end of July, though still below the 22 times multiple seen at the start of 2026.
Economic data added to the cautious tone. July retail sales came in weaker than expected, following an unrevised 0.2% gain in June.
Consumer confidence also deteriorated. The University of Michigan’s preliminary consumer sentiment index dropped to 51 in August, missing the 54.5 forecast.
The mixed data has solidified expectations for the Federal Reserve. Traders are pricing in a 67% probability that the central bank will hold interest rates steady at its September meeting, with a 33% chance of a hike.
Geopolitical risks further weighed on sentiment. Transit through the Strait of Hormuz slowed to a near standstill following attacks on two ships, while the United States signaled it could maintain an indefinite naval blockade of Iran.
Diplomatic efforts appear stalled. A senior Iranian source noted there has been no progress in talks to build on a June agreement to end the war.
Corporate news drove individual stock movements. Reddit surged after being added to the S&P 500 effective August 18.
Workday dipped following an 18% surge Thursday on reports of a potential buyout by private equity firm Silver Lake. Drone manufacturers Red Cat and Unusual Machines jumped after President Donald Trump announced planned tariffs on imported drones and components.
