U.S. chip stocks plummeted on Thursday, on track for their worst day since 2020, after a conservative forecast from Arm Holdings dampened investor optimism about artificial intelligence and data signaled a cooling economy.

Shares of Arm sank 16% after the British chip designer's forecast sparked worries that returns from a spending frenzy on AI computing by Microsoft, Alphabet, Amazon, Meta Platforms and other megacaps would be slower to materialize than previously expected.

"For the first time ... the company did not raise their outlook. The lack of upside could be seen as a negative for the stock that trades at a sky-high valuation," Needham analyst Charles Shi wrote in a client note on Thursday, maintaining his "hold" rating.

Losses in chipmakers' shares and the broader market accelerated after a slew of data spurred concerns the economy may be slowing faster than anticipated while the Federal Reserve maintains its restrictive monetary policy. The S&P 500 was last down 1.8%.

The PHLX semiconductor index tumbled more than 8%, headed for its worst one-day percentage decline since March 2020 when the coronavirus pandemic sent global markets into a tailspin.

That more than undid a 7% spike in the chip index on Wednesday after a strong Advanced Micro Devices forecast and Microsoft's surge in quarterly spending related to AI sent Nvidia and other semiconductor stocks surging.

Nvidia dropped 8%, giving back gains a day after the dominant AI chipmaker's stock soared 13% and added $330 billion in market capitalization, a record one-day gain for any company on Wall Street.

Nvidia shares remain 117% higher in 2024 but down 21% from its record high close on June 18.

The chip index remains up 15% in 2024.

Amazon reports quarterly results after the bell and will offer investors a fresh glimpse of how much money it is spending to build out its AI infrastructure.

  - Reuters