US STOCKS-Wall Street drops as AI worries hit tech stocks

By Noel Randewich and Pranav Kashyap

Feb 4 (Reuters) - U.S. stocks dropped on Wednesday, with losses in Advanced Micro Devices, Palantir and other technology companies, as investors worried about pricey valuations and whether Wall Street's AI rally has reached its peak.

Alphabet GOOGL.O fell 2.3% ahead of its quarterly results after the bell, which will give investors a fresh glimpse of how much the Google-owner's massive investments in AI are contributing to its top-line sales growth.

Advanced Micro Devices AMD.O tumbled 16% after the chipmaker forecast quarterly revenue that disappointed investors and suggested it is having a tough time competing against AI heavyweight Nvidia NVDA.O.

Nvidia dropped 3.7%, and the PHLX semiconductor index .SOX lost 5.4%.

Palantir PLTR.O slumped 13%, reversing sharp gains from the previous day that were driven by the AI data company's strong quarterly sales .

"The size of the infrastructure buildout is unprecedented, and the pace of consumers and businesses adopting AI tools is also unprecedented. The stock market is having a really hard knowing where to price the stocks and what the future looks like. ... The market is suddenly skeptical and concerned about it," said Jed Ellerbroek, a portfolio manager at Argent Capital in St. Louis.

Some software companies added to recent losses amid worries that rapidly advancing AI could disrupt industry incumbents. Snowflake SNOW.K fell 7% while Datadog DDOG.O lost 4.5%.

"If you've got legacy software that's old and clunky, you're a ripe target for AI. We're a bit bearish on software in general, with the whole impetus of AI," said Josh Chastant, Portfolio Manager, public investments at GuideStone Funds.

Investors selling AI-related stocks shifted into less pricey companies that sat out the tech rally in recent years. The S&P 500 value index .IVX gained 0.75% and was on track for its fifth consecutive session of advances. The S&P 500 growth index .IGX dropped 2.30%.

The S&P 500 was down 0.64% at 6,873.72 points.

The Nasdaq declined 1.74% to 22,851.82 points, while the Dow Jones Industrial Average was up 0.18% at 49,328.36 points.

Even as the S&P 500 fell, six out of 11 of its sector indexes rose, led by real estate .SPLRCR, up 1.74%, followed by a 1.57% gain in energy .SPNY.

Additionally, advancing issues outnumbered falling ones within the S&P 500 .AD.SPX by a 2.4-to-one ratio.

Super Micro Computer's SMCI.O shares jumped 9% after the company raised its annual revenue forecast on sustained demand for its AI-optimized servers as companies ramp up data-center capacity.

Shares of the drugmaker Eli Lilly LLY.N rallied 10% after the company forecast 2026 profit above Wall Street expectations.

The government's closely watched jobs report for January has been pushed back from its scheduled release on Friday due to a four-day partial government shutdown that ended on Tuesday .

In the meantime, the ADP's national employment report on Wednesday showed that U.S. private payrolls increased less than expected in January amid job losses in the professional and business services as well as manufacturing sectors.