US STOCKS-Wall St falls as hot inflation, Iran tensions weigh

By Ragini Mathur and Utkarsh Hathi

May 12 (Reuters) - The S&P 500 and the Nasdaq pulled back from record highs on Tuesday, with technology stocks leading declines, after a hotter-than-expected inflation report and stalled efforts to resolve the Middle East conflict weighed on sentiment.

U.S. consumer prices rose at a brisk pace for a second straight month in April, pushing annual inflation to its highest level in nearly three years and reinforcing expectations that the Federal Reserve will keep interest rates unchanged for longer.

While a strong earnings season has helped underpin market sentiment in recent weeks, investors remained on edge as negotiations between Washington and Tehran have shown little sign of progress.

President Donald Trump said a ceasefire with Iran was "on life support" after Tehran rejected a U.S. proposal to end the conflict, keeping crude prices elevated and fueling inflation worries.

"The market is now looking at the Fed and saying the next move, if there is one, it might be a hike, not a cut. And that certainly would be a change of framework for the markets," said Scott Welch, chief investment officer of Certuity.

Ahead of the war, traders had expected two rate cuts, per CME Group's FedWatch Tool, but currently expect the Federal Reserve to keep interest rates steady through the end of the year.

At 12:30 p.m. ET, the Dow Jones Industrial Average .DJI fell 177.42 points, or 0.36%, to 49,527.05, the S&P 500 .SPX lost 65.48 points, or 0.88%, to 7,347.36 and the Nasdaq Composite .IXIC lost 448.73 points, or 1.71%, to 25,825.79.

Technology stocks .SPLRCT were a big drag on the markets on Tuesday, with chip stocks that have skyrocketed in recent days falling sharply.

The Philadelphia SE Semiconductor index .SOX tumbled almost 6% but still remained up about 50% so far this quarter. The sector was also knocked by news that South Korea's presidential policy adviser Kim Yong-beom floated an idea of "citizens dividend", as he argued in a social media post that excess earnings in the era of AI should be redistributed to all citizens.

"There's been such a remarkable rally in the semiconductor and mega cap tech stocks over the last several weeks, that I think investors are starting to take some profits," Welch added.

Intel INTC.O tumbled 9.7% after climbing more than 17% over the previous two sessions, while Qualcomm QCOM.O dropped 13.7% after hitting a record high on Monday.

Looking ahead, markets are keeping a close eye on Trump's visit to China, which begins on Wednesday, with expectations low for progress on Iran or on the trade front.

Among other movers, Zebra Technologies ZBRA.O jumped 16.8% after the barcode scanner maker raised its annual sales growth forecast, betting on robust demand for its products that help automate manufacturing workflows.

Hims & Hers Health HIMS.N tumbled 15.2% after the telehealth firm missed Wall Street estimates for first-quarter revenue and posted a surprise loss.

Declining issues outnumbered advancers by a 2.84-to-1 ratio on the NYSE, and by a 2.76-to-1 ratio on the Nasdaq.

The S&P 500 posted 11 new 52-week highs and 28 new lows while the Nasdaq Composite recorded 43 new highs and 126 new lows.