Key Highlights

● A broad reversal in software valuations was cited as the main driver of the slide.

● A separate report raised the chance that Democrats gain subpoena power after the midterms.

● Peers ServiceNow, Salesforce, Atlassian and Snowflake also fell as the selling accelerated late.

● Meta, Tesla, IBM and SAP report Oct 21, ahead of the Fed's Oct 28 decision.

Two forces at work

One of the steeper declines among large software companies on the S&P 500 belonged to Palantir Technologies (NASDAQ:PLTR), which slid on Friday. Coverage described a sharp drop, with a late-day reading of $185.29, and the size of the move varied somewhat between reports.

A broad reversal in software valuations was cited as the main driver. Separately, a report pointed to a published item saying Democrats could gain subpoena power after the upcoming midterm elections, a political item rather than company news.

The item is relevant context for Palantir because the company counts U.S. government agencies, including defense and intelligence bodies, among its largest customers. It was cited in coverage of the stock without suggesting any specific action involving the company.

Correction territory

Measured against its Oct 9 record high, Palantir ended in correction territory, and roughly $34 billion to $35 billion of market value disappeared. The data-analytics company had set that record just a week earlier, underscoring how quickly sentiment toward high-flying software names turned.

Software selling spreads

Palantir had plenty of company. A software basket tracked in market reports saw 41 of its 45 stocks fall on Friday, wiping out roughly $130 billion in value. ServiceNow (NYSE:NOW) slid, Salesforce (NYSE:CRM) and Atlassian (NASDAQ:TEAM) fell, and Snowflake (NYSE:SNOW) tumbled. Datadog (NASDAQ:DDOG) and Zscaler (NASDAQ:ZS) slid, and Okta (NASDAQ:OKTA) sank.

The selling accelerated late in the session, and the S&P 500 suffered its steepest losses in the final hour.

Behind the move was a broader rethink of the AI trade, as investors moved from asking what AI can do to asking how it will be financed. One market commentator wrote, "The AI group is now splitting between companies that can fund the buildout themselves and those that have to borrow."

Higher bond yields added to the pressure on growth stocks. A head investment strategist at the Franklin Templeton Institute said in published comments that "pressure across the long end of the curve acts as a valuation headwind for risk assets." The 10-year Treasury yield eased to roughly 5.1 on Friday but topped 5.3 earlier in October, its highest since 2002.

The market picture

The S&P 500 fell 84.62 points to 7,659.44, ending a 55-session stretch without a steep daily drop. The Nasdaq Composite dropped 572.99 points to 26,140.03, and the Dow Jones Industrial Average slipped 175.28 points to 52,002.41. According to market data, all but seven of the 75 S&P 500 technology stocks closed lower.

Energy, utilities and consumer staples gained as money rotated away from technology. The VIX volatility index jumped 3.53 points to 19.99. Federal Reserve Chair Kevin Warsh, speaking in Bangkok, declined to signal the October decision. "I don't prejudge meetings," he said.

Midterms and Tech Earnings Await Palantir

The midterm elections are approaching, and investors will be watching how the political landscape develops. The Federal Reserve's next rate decision is due Oct 28, followed by the PCE inflation report and the first estimate of third-quarter GDP on Oct 29. On the earnings front, Meta (NASDAQ:META), Tesla (NASDAQ:TSLA), IBM (NYSE:IBM) and SAP (NYSE:SAP) report on Wednesday, Oct 21.