Wall Street falls as investors weigh AI valuations and Middle East tensions

Wall Street ended the week lower on Friday as investors continued to reassess the value of artificial intelligence-linked stocks while also watching the worsening situation in the Middle East. The retreat extended a week-long decline in US markets, with the S&P 500 falling 1.6% over the week. In contrast, European shares fell 0.7% and the Australian market slipped 0.1% over the same period.

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The pressure was most visible in the semiconductor and data memory sector, where the Philadelphia SE Semiconductor Index recorded its steepest weekly loss in more than a year. The index has fallen more than 18% so far in July, putting it technically into bear market territory. Even so, it remains up nearly 65% for the year to date, compared with the S&P 500's gain of nearly 9% over the same period.

Among the large US technology companies often grouped as the Magnificent Seven, all but Apple fell on the day. Meta dropped 2.7% and Alphabet fell 3.2%, making them the weakest performers in that group. The broader market was less affected, and second-quarter earnings season remained relatively strong, with 49 S&P 500 companies having reported results and 90% beating expectations, according to LSEG.

The latest moves matter because they suggest investors are becoming more cautious about the scale of spending in the artificial intelligence sector after a long rally. Some active fund managers have already begun reducing exposure, and market strategists say the recent pullback reflects concern that chip stocks had risen too far, too fast. At the same time, rising oil prices and geopolitical uncertainty are adding another layer of pressure to sentiment.

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The sell-off comes after a year in which AI-related shares have been among the main drivers of US market gains. The semiconductor index's sharp weekly fall shows how quickly sentiment can shift when investors start to question valuations, even if company earnings remain strong. The Middle East backdrop is also feeding into broader market caution, with traders watching for any further impact on energy prices and risk appetite.

What remains unclear is whether the current decline is a short-term correction or the start of a longer reset in AI-linked stocks. Investors will be watching upcoming earnings reports, any further movement in oil prices and developments in the Middle East for signs of whether the pressure on Wall Street continues. The Australian market was expected to open higher, but the direction of global equities will depend on whether these concerns deepen or ease.

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