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The S&P 500 fell 1.4 per cent on Tuesday, with the technology sector alone down 2.5 per cent. The Dow Jones gave up an early gain and closed just 0.1 per cent lower.
The sell-off in big technology stocks spread from Asia back to the US, with Micron Technology slumping 13.2 per cent and Nvidia falling 4.1 per cent. The selling largely targeted companies that have seen their values surge amid the frenzy over artificial intelligence technology.
The Australian sharemarket is set to advance, with futures pointing to a gain of 33 points, or 0.4 per cent, at the open. The ASX lost 0.3 per cent on Tuesday, with the technology stock slump hitting Asian markets. South Korea's Kospi index, a big winner in the AI boom, sank 10 per cent.
Stocks in Europe also fell, with the FTSE 100 down 1.2 per cent and the DAX down 1.5 per cent.
The growing likelihood of interest rate hikes later this year has helped deflate the massive run-up in AI-related stocks in recent days as traders worry that the higher rates could hamper economic growth.
Analysts have been warning that high-flying technology stocks could be due for a downturn. "Viewed through this lens, a period of consolidation is reasonable, in our view, after such a sharp move higher," wrote Brock Weimer, investment strategy analyst at Edward Jones, in a research note.
The potential for higher interest rates can stifle future spending and hurt prices for investments. The Federal Reserve has signalled that it could raise interest rates at least once before the end of the year.
Wall Street sees an 85 per cent chance that the central bank will raise its benchmark interest rate this year, according to data from CME Group. That's compared to 60 per cent a week earlier.
In other news, Chinese tech and e-commerce giant Alibaba sued the US Department of Defence for designations including saying it was a "Chinese military company," according to a court filing.
"The determinations have no basis in fact or law," Alibaba said in its lawsuit.
"Its products and services are built for retail, logistics, and enterprise information technology—not weapons, defence, or intelligence," the company said.
The United States in June added Alibaba, internet search provider Baidu, and automakers BYD and NIO to a list of companies it believes are aiding Beijing's military.
The yield on the 10-year Treasury slipped to 4.50 per cent from 4.51 per cent late Monday. The yield on the 2-year Treasury fell to 4.20 per cent from 4.24 per cent late Monday.
Bond yields remain high, though, amid worries about inflation. Inflation has been heating up throughout the year, with the impact from tariffs helping to halt and reverse what had been an easing of inflation growth.
The US war with Iran quickly pushed energy prices higher, including gas prices. Higher energy costs have also made shipping more expensive for a wide range of goods, and that has been weighing on businesses and households.
A report due Thursday with an inflation measure that is preferred by the Fed is expected to show that inflation rose to 4.1 per cent in May. Oil prices have eased amid negotiations between the US and Iran to end their war.
The price for a barrel of US crude for August delivery fell 0.9 per cent to settle at $73.21. The September delivery price for a barrel of Brent crude, the international standard, fell 0.9 per cent to settle at $76.80. Prices are still above levels of roughly $70 per barrel before the war began.