AI trade under pressure as U.S. tech stocks decline

After soaring over 50% since April’s lows and pushing valuations to a year-high price-to-earnings ratio of 30, the S&P 500 tech sector faces skepticism, as studies and OpenAI’s Sam Altman warn AI enthusiasm may be outpacing real-world returns

U.S. technology stocks, which have driven much of Wall Street’s rally this year, are showing signs of fatigue as investors trim positions ahead of key remarks from Federal Reserve Chair Jerome Powell. Market participants say concerns over lofty valuations and overstretched bets on artificial intelligence (AI) are adding to the caution.

Powell is scheduled to speak Friday (August 22) at the annual Jackson Hole symposium, a closely watched event where investors expect hints on whether the central bank will cut interest rates at its September meeting. Fed fund futures currently point to an 84% probability of a rate reduction, but analysts warn of volatility if Powell’s comments disappoint.

“When you have such strong performance and concentrated positioning, it doesn’t take much to trigger selling,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “This week everyone is waiting for the Fed, and there is repositioning ahead of that.”

The tech-heavy Nasdaq Composite is down roughly 2% for the week, while the S&P 500’s technology sector has fallen about 2.5% over two sessions. Some of the most prominent winners of the AI trade, including Nvidia and Palantir Technologies, have faced steep declines. Nvidia has shed nearly 5% since last week, while Palantir has dropped around 16%.

AI hype meets caution

The pullback comes after a remarkable run that saw the S&P 500 tech sector jump more than 50% since April’s market low, far outpacing the broader index’s 29% gain. The surge has pushed valuations higher, with the sector’s price-to-earnings ratio climbing to around 30 times forward earnings—the highest level in a year.

Skepticism has been mounting about whether the AI boom can justify such gains. A recent study from the Massachusetts Institute of Technology found that 95% of organizations have yet to see returns on AI investments. Adding to the cautious tone, OpenAI CEO Sam Altman warned in an interview last week that investor enthusiasm for AI may be running ahead of reality.

Despite these concerns, some analysts view the recent weakness as a normal correction. “These are price adjustments, not a collapse in confidence,” said Andrew Almeida, director of investments at XYPN. “The long-term picture suggests increasing capital will flow into AI infrastructure, so this is hardly the end of the theme.”

Seasonal weakness and market rotation

August and September have historically been challenging months for U.S. equities. Over the past 35 years, the S&P 500 has averaged weaker returns during this period, according to the Stock Trader’s Almanac. Analysts suggest that stretched valuations in technology, combined with the seasonal backdrop, are prompting investors to diversify into other areas.

Sectors such as consumer staples, healthcare, and financials have posted gains this week, and the equal-weight S&P 500 index has shown relative strength. Some market watchers see this as an early sign that leadership could broaden beyond the handful of mega-cap tech firms that have powered the market higher in 2025.

“There are a lot of investors who overweighted tech, and it worked well for them,” said Chuck Carlson, chief executive of Horizon Investment Services. “But with uncertainty around Fed policy, it makes sense to trim exposure and avoid getting caught on the wrong side.”

As Powell prepares to deliver his highly anticipated speech, the question for investors is whether the Federal Reserve will confirm expectations of imminent rate cuts—or signal patience, which could test the resilience of high-flying tech stocks.