The technology sector selloff extended into its second day as investors began taking profits on the star performers that have driven index gains this year.

Overnight, the Dow Jones Industrial Average edged up less than 0.1%, while the S&P 500 Index fell for the fourth consecutive session. Tech weakness dragged the Nasdaq Composite Index down 0.7%, bringing its two-day cumulative decline to 2.1%.

Traders indicated that this round of selling lacked a single catalyst, though some investors pointed to recent comments from OpenAI CEO Sam Altman regarding the "bubble characteristics" of the AI boom.

Particularly noteworthy was the decline of data analytics software company Palantir Technologies Inc., whose stock has fallen for six consecutive trading sessions, marking its longest losing streak since April 2024, with market capitalization evaporating by $73 billion.

This decline was triggered by a report from prominent short-selling firm Citron Research, which directly criticized the stock price as "detached from fundamentals" and argued that its fair valuation should be far below current levels.

Analysts view Palantir's decline as emblematic of the market's repricing of overvalued stocks. Vikram Rai, portfolio manager at Fny Capital Management LP, stated that this selloff "was long overdue":

"When companies like Google, Meta, and Microsoft are declining, those high-beta stocks with ridiculous valuations are obviously going to fall much more."

Tech Sector Faces Broad Pullback as Profit-Taking Sentiment Spreads

The tech stock selloff affected the entire sector. Chip manufacturer Micron Technology fell 4%, while Apple declined 2%.

Brian Jacobsen, chief economist at Annex Wealth Management, commented:

"We've been concerned about tech stock valuations. Market prices reflect very aggressive growth expectations, and when prices depend on growth expectations, it creates vulnerability."

Nevertheless, many investors remain optimistic about the long-term prospects for technology stocks, citing the sector's strong earnings growth as its core support.

Seven of the S&P 500's 11 sectors advanced, indicating that some investors are simply locking in profits and rotating capital to cheaper areas of the market. Market performance outside of technology remained relatively calm, with the Dow's volatility staying below 0.1% for five consecutive trading sessions, the longest such streak since 1994.

Palantir Becomes Short-Selling Target as High Valuations Draw Scrutiny

As the best-performing stock in the S&P 500 this year, Palantir Technologies Inc.'s sharp decline has made it a focal point of market attention.

Market data shows that after six consecutive days of decline, Palantir's stock price has retreated more than 18% from recent highs, not only entering technical correction territory but also falling out of the ranks of America's 20 most valuable companies.

Last week, Citron founder Andrew Left called Palantir "way beyond overvalued" and noted that if measured by the price-to-sales ratio corresponding to OpenAI's recent $500 billion valuation, Palantir's stock price should be around $40.

In the short-selling report, Left stated:

"Compared to true artificial intelligence leaders, Palantir's current price already reflects success beyond its fundamentals."

Previously, Palantir's stock soared on its first $1 billion revenue quarter and the AI boom. Despite recent declines, its forward price-to-earnings ratio of 193 times still makes its valuation appear particularly "expensive" among peers.

Short Sellers Gain Rare Profits but Remain in Overall Loss

According to S3 Partners data, Palantir's stock pullback has generated over $1.6 billion in paper profits for short sellers, though this only partially offsets their cumulative $4.5 billion in paper losses this year.

Despite the recent significant correction, Palantir remains up 106% year-to-date, still making it the largest gainer among S&P 500 components.

Steve Sosnick, chief strategist at Interactive Brokers LLC, noted that due to the stock's previous momentum, many short sellers had abandoned their bets against the stock over the past year. S3 Partners data confirms that Palantir's short interest as a percentage of float has declined from nearly 5% a year ago to about 2.5%.

Signs suggest that as Palantir's stock shows weakness, short sellers may be regrouping.

S3 Partners data indicates that since early June, Palantir's short positions have increased by approximately 10 million shares. Market consensus suggests that if Palantir's stock rebounds, it could attract more short sellers to enter positions.