U.S. markets sold off sharply on Friday as investors pulled back from recent winners in technology and artificial intelligence, while stronger-than-expected employment data shifted expectations for Federal Reserve policy further toward higher interest rates.
The broad market slump was led by heavy losses in growth stocks. The S&P 500 dropped 2.64%, marking its worst single-day performance since October and snapping a nine-week winning streak. The Nasdaq Composite tumbled 4.18%, its sharpest decline since April 2025, as investors rotated out of high-momentum AI and tech names that had driven much of the recent rally. The Dow Jones Industrial Average fell 695 points, or 1.35%, reflecting its lighter concentration in technology compared with other major indexes.
Volatility surged across Wall Street as sentiment weakened. The VIX jumped about 40%, reaching a two-month high and signaling a rapid increase in demand for downside protection.
The catalyst for the shift came from the latest U.S. labor market report issued by the Bureau of Labor Statistics. The economy added 172,000 jobs in May, well above forecasts, underscoring continued strength in hiring even as inflation concerns persist.
Rather than reassuring investors, the robust data reinforced the idea that monetary policy may need to stay restrictive for longer. Markets quickly adjusted expectations for the Federal Reserve, with traders increasing the odds of a potential rate hike later in the year if inflation fails to ease.
Pricing in derivatives markets tracked by CME Group now suggests a 43% probability of a rate increase in December, up from 26% a month earlier, reflecting a notable shift in sentiment over just a few weeks.
Adding to pressure on equities, concerns about inflation have been amplified by recent energy price increases linked to geopolitical tensions, reinforcing fears that price pressures could remain sticky.
The combination of rising rate expectations and stretched valuations in parts of the technology sector triggered a broad risk-off move. AI-related stocks, which have been among the strongest performers of the year, led the decline as investors reassessed whether earnings growth can justify elevated valuations.
Other markets also reflected the shift in risk appetite, with bonds weakening and alternative assets such as bitcoin and gold also slipping as investors moved toward cash and safer short-term holdings.
The sharp downturn highlights how sensitive markets remain to changes in interest rate expectations. Even in a backdrop of solid economic data, investors are increasingly focused on how long restrictive monetary policy will persist—and what that means for richly valued segments of the equity market.
