AI Stocks Bounce Back After $1 Trillion Wipeout—But Wall Street's Fear Gauge Just Hit a 4-Month High

US stock futures climbed Monday, signaling a recovery after artificial intelligence (AI) stocks suffered their biggest weekly drop since April last year, wiping out more than $1 trillion in market value from major technology firms [265846]. Nasdaq 100 futures gained 1%, suggesting buyers are returning to the sector [265846].

The selloff had pushed Wall Street's main measure of market fear to a four-month high. The Cboe Volatility Index, known as the VIX, climbed above 22 on Monday for the first time since April, as traders bet on continued turbulence ahead [264367].

The sharp swings in AI-related companies came as investors questioned their high valuations, with concerns mounting that the rapid rise in AI stock prices had outpaced actual earnings [265430][265846]. The technology-heavy Nasdaq fell the most during the weekly decline, while the S&P 500 also slipped [265430].

Adding to the pressure, new economic data showed inflation remains stubborn, reducing hopes that the Federal Reserve will cut interest rates soon [265430]. Higher rates tend to hurt technology stocks most because they rely on future profits, which become less valuable when borrowing costs stay elevated [265430].

The tension between strong corporate earnings and rising borrowing costs is setting up a critical test for the stock market, with one strategist warning that investors may be wrong to assume AI stocks can withstand higher interest rates [265375].

As concerns about AI-related borrowing grew, investors rushed into US government bonds this week, pushing yields lower as they searched for safer places to put their money [264480]. AI companies are spending heavily on data centers and computing power, much of it funded by debt, and investors fear that if spending slows or debt becomes unmanageable, the fallout could spread through markets [264480].

The shift lowered yields for the week, a sign that demand for safe-haven bonds stayed strong even as worries about AI-related borrowing persisted [264480]. US Treasuries are showing early signs of returning to their traditional role as a safe haven, a shift that could catch off guard investors who bet heavily that this year's bond slump would deepen [265442].

Outside the US, the picture was brighter. Major stock indexes in Europe and Asia posted gains, helped by strong corporate earnings and hopes for economic stimulus in China, as global investors shifted some money away from expensive US tech shares toward cheaper markets [265430].

Analysts caution that volatility may continue as markets weigh the sector's long-term value against its recent hype-driven gains [265846].