US tech stocks have stumbled after a sharp rally, with investors increasingly cautious over AI-linked valuations and shifting market conditions. The S&P 500 tech sector has dropped around 2.5% this week, while the Nasdaq has slipped 2%, led by losses in Nvidia and Palantir.

The fall follows a 50% surge in tech shares since April, far outpacing the broader market and pushing valuations to year-highs. Concerns are growing that investor enthusiasm around AI has become overheated, with some funds reducing their exposure ahead of expected interest rate guidance.

US market watchers are now focused on Federal Reserve Chair Jerome Powell's speech at Jackson Hole, which could signal if rate cuts are on the horizon. Tech stocks, already heavily weighted in many portfolios, are particularly vulnerable to higher rates due to their stretched price-to-earnings ratios.