The calm period in the US stock market is over! The S&P 500 ends its record of 53 consecutive trading days without a drop of over 1%. AI stock sell-off intensifies market concerns.

According to Zhihui Finance APP, as concerns grow over the sustainability of the artificial intelligence (AI) investment frenzy and the latest US inflation data exceeded expectations, US stocks faced significant sell-off on Wednesday. The S&P 500 Index fell by 1.1%, ending its streak of 53 consecutive trading days without a drop of 1% or more—the longest calm period since January 2020. Technology giants and semiconductor stocks were the main drag in this downturn, raising concerns that the US stock market's four-year bull run may face bigger challenges.

Data released by the US Bureau of Labor Statistics on Wednesday showed the September Consumer Price Index (CPI) rose 0.6% month-on-month, marking the biggest increase since April. Renewed inflationary pressures further strengthened market expectations for continued rate hikes by the Federal Reserve, even if the Fed decides to keep rates unchanged in October, further tightening of monetary policy may still follow.

Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, stated that chip manufacturers and AI infrastructure-related stocks, which had previously surged, are now under downward pressure due to a loss of upward momentum, with the latest inflation data exacerbating market worries over Fed rate hikes. He pointed out that the market had originally hoped the Fed’s September rate hike would be a one-off move, but Wednesday's data suggests this scenario is now much less likely.

Notably, this decline disrupted the weeks-long period of low volatility in US stocks, posing challenges for quantitative funds that had been consistently buying shares. These funds, relying on computer models for trading, increased their equity exposure during the lull in volatility but are now facing a sudden reversal of market momentum.

The Nasdaq 100 Index dropped 2%, marking its biggest single-day decline since July. The "Magnificent Seven" Index, tracking the performance of the seven leading US tech giants, also fell by about 2%, with Apple (AAPL.US) being the only stock closing higher, up 0.5%. Meanwhile, the closely-watched semiconductor index fell for the sixth consecutive session, accumulating a nearly 12% slump, reflecting rising concerns over the valuation and future growth prospects of AI-related stocks.

Jonathan Krinsky, Chief Technical Strategist at BTIG, noted that semiconductor stocks have already begun to fall amid rising interest rates. If the leading seven tech giants demonstrate a similar trend, it would further reinforce the view that the US stock market could face a “Red October.”

The weakness in tech stocks has also spread to the AI infrastructure financing market. AI cloud computing service provider CoreWeave (CRWV.US) saw its bond prices plunge sharply, sparking concerns among investors about rising corporate debt risks in the sector.

According to TRACE trading data, CoreWeave’s unsecured bonds due in 2032 fell below 80 cents per dollar face value on Wednesday. A drop below this threshold is generally considered a significant sign of financial stress for issuers. As a result, CoreWeave shares plummeted over 15% on Wednesday.

Matt Maley, Chief Market Strategist at Miller Tabak, stated that in the past, when markets were concerned about credit risk, tech stocks often performed well, while the credit market would ease as tech stocks came under pressure. However, on Wednesday, both risks emerged simultaneously. This means investors are not only reassessing the high valuation of AI-related stocks but are also focusing on the credit risks associated with large-scale financing by AI infrastructure companies.

Meanwhile, small-cap stocks, which are more sensitive to interest rate changes, experienced notable sell-offs. The Russell 2000 Index slid 1.9% Wednesday, accumulating an 11% decline from its August peak. It is worth noting that even as US Treasury yields retreated from intraday highs following the inflation data, US stocks remained under pressure, indicating that investor worries have extended beyond rising rates to include tech stock valuation, corporate financing, and overall market risk appetite.

Nevertheless, despite the notable decline on Wednesday, there has been no broad panic in the US equity market. The S&P 500 is currently only about 1.3% away from the historical high recorded last week. At the same time, the Cboe Volatility Index (VIX), which measures expected market volatility, hovered around 17, still below the key 20 level typically viewed as a sign of significant market stress.

In addition, some active fund managers who missed the earlier gains in US equities may become potential buyers if the market continues to correct.

Data compiled by Deutsche Bank shows that, due to factors such as high US Treasury yields and risks related to the Iran conflict, active managers’ equity positions are currently in the lower third of their historical range. The gap in equity exposure between active funds and rules-based systematic funds has widened to its second-largest level since 2020.

This means that, compared to quantitative funds that have continuously increased their equity exposure, active investors still have considerable room to increase holdings. Should US stocks correct further, some active capital may re-enter the market, providing support.

In fact, since the end of March, the total market capitalization of the S&P 500 Index has increased by approximately $13 trillion. After months of continuous gains, the valuation and position levels of tech giants and AI-related stocks have become a focal point for the market.

With US inflation reaccelerating, the likelihood of further Fed rate hikes rising, and risks from AI infrastructure financing emerging, investors are reassessing the core drivers behind the current US equity bull market. However, market volatility remains relatively mild, and active investors' equity positions are still low, meaning it remains to be seen whether this pullback will turn into a broader and deeper adjustment.