Record Scratch. The Nasdaq Composite just wrapped its worst day in more than a year.

The tech-heavy index sank 4.2%, while the S&P 500 dropped 2.6%, and the Dow Jones Industrial Average fell 695 points, or 1.4%.

What began as a sharp reversal in highflying artificial intelligence stocks before the market opened snowballed into a broad market selloff that drowned the broader indexes.

Disappointment from Broadcom’s earnings report Wednesday evening triggered the first wave of AI stock selling on Thursday, but the slide spilled over into early morning trading today. In the end, the company’s stock fell another 7.9% on Friday, while the PHLX Semiconductor Index, or Sox, fell 10.3%. The chip stock benchmark had its worst day since March 16, 2020.

Mizuho’s Daniel O’Regan reminded clients in a note this afternoon that the S&P, Nasdaq 100, and SOX were all “EXTREMELY overbought.”

“Positioning was crowded and stretched—this is what normalizing looks like,” O’Regan wrote. “IF YOU ZOOM OUT today’s selloff only takes us back to levels last seen just a few weeks ago.”

The chip stock reversal in recent sessions could have been an opportunity for the market’s rally to broaden, but that hope was crushed by a labor market report, which showed that the U.S. added another 172,000 nonfarm jobs in May. The hot reading increased the odds of an interest rate hike later this year, and sent bond yields higher.

“When the 10-year has sustained a yield above 4.5%, that has been a kind of yellow flag for the equity market,” David Donabedian, senior investment strategist at CIBC Private Wealth, told me. “That definitely bears watching, obviously, impacting more than the technology sector but also other interest-sensitive sectors. So that’s on the worry list at the moment.”

The hot labor market means there will be even more focus on two inflation gauges coming out next week. The May consumer price index is due on Wednesday, followed by the producer price index on Thursday.

Donabedian expects investors to scrutinize the CPI, especially in the wake of energy price spikes related to the Iran war. He thinks the headline increase could be upwards of 4%, with core CPI getting near 3%.

If that is the case, along with the latest jobs numbers, it gets difficult “to even conceive of the Fed thinking seriously about cutting rates,” he says.

Watch our TV show on Fox Business Fridays at 7:30 p.m. ET and Saturdays and Sundays at 9:30 a.m. or 10:30 a.m. ET. This week, Tenacity founder and general partner Ben Narasin on the IPO boom. Plus, debating SpaceX’s value ahead of next week’s offering.

The Hot Stock: Cooper +8.6%
The Biggest Loser: Micron Technology -13.3%

Best Sector: Consumer Staples +1.6%
Worst Sector: Technology -5.8%

With the labor market seemingly on solid footing now, Wall Street will turn its attention to the other side of the Federal Open Market Committee’s dual mandate: price stability.

The Bureau of Labor Statistics will release the consumer price index on Wednesday and the producer price index on Thursday. Both inflation measures are running at multi-year highs, and core CPI hasn’t been at or below the Federal Reserve’s two percent target in more than five years.

This week also brings perhaps the most anticipated initial public offering in history: SpaceX. The company is expected to price its IPO on Thursday and begin trading on Friday. It plans to raise $75 billion, more than double the current record held by Saudi Aramco’s IPO from early 2020.

Six S&P 500 index companies report results this week, among them Oracle on Wednesday and Adobe on Thursday.

—Dan Lam

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