Updates to mid-afternoon trading

By Stephen Culp and Ragini Mathur

NEW YORK, May 15 (Reuters) - U.S. stocks retreated from artificial-intelligence-fueled record highs on Friday, as spiking crude prices ignited global inflation fears.

All three major U.S. stock indexes veered lower as a jump in benchmark Treasury yields, reflecting surging energy prices and concerns about long-term inflation, offered an attractive alternative to higher-risk equities. The stock indexes were off session lows, however.

"There’s a realization that the market had gotten way ahead of itself," said Kenny Polcari, chief market strategist at Slatestone Wealth in Jupiter, Florida. "It wasn’t paying enough attention to what the bond market and economic data is telling it. It was caught up in this momentum AI trade."

Crude prices surged after combative comments from U.S. President Donald Trump and Iran's Foreign Minister Abbas Araqchi raised doubts as to whether their countries' fragile truce would hold and dampened hopes that normal traffic through the crucial Strait of Hormuz would soon resume.

The yield on 10-year Treasury notes US10YT=RR, an indicator of global borrowing costs, touched its highest level since May 2025, when markets were reeling from Trump's "Liberation Day" tariff proclamation.

Global bond yields also jumped on growing evidence of the Iran war's widespread economic damage.

Exacerbating inflation concerns arising from the war with Iran, Trump's summit with Chinese President Xi Jinping appeared to yield few tangible results.

END OF POWELL ERA

Friday marks Jerome Powell's last day as U.S. Federal Reserve chair, a position he has held through the pandemic, periods of inflation, and interest rate hiking and cutting cycles.

Incoming Chair Kevin Warsh is saddled with the potential need for a rate hike if a protracted Iran war leads to sticky inflation.

"The market is going to test Kevin Warsh," Polcari added. "They’re going to press him to see what he really stands for.”

The odds of the Fed hiking interest rates by 25 basis points in December are approaching 40%, up from 13.6% a week ago, according to CME Group's FedWatch tool.

The Dow Jones Industrial Average .DJI fell 406.40 points, or 0.81%, to 49,657.06, the S&P 500 .SPX lost 50.23 points, or 0.67%, to 7,451.01 and the Nasdaq Composite .IXIC lost 195.89 points, or 0.73%, to 26,439.34.

Among the 11 major sectors in the S&P 500, energy shares .SPNY jumped 1.6%. The 10 remaining sectors lost ground, with materials .SPLRCM and utilities .SPLRCU suffering the steepest percentage losses.

The Philadelphia SE Semiconductor Index .SOX slid 2.3%, dragged lower by stocks that have benefited from the AI hyperscaler phenomenon.

Nvidia NVDA.O and AMD AMD.O fell by 2% and 3.1%, respectively, while Intel INTC.O dropped 5.1%.

Microsoft MSFT.O rose 4.4% following the disclosure of a new position in the company taken by Bill Ackman's hedge fund Pershing Square.

Dexcom DXCM.O jumped 6.7% following the medical device maker's announcement that it will appoint two independent directors and revamp a board committee in collaboration with activist investor Elliott Investment Management.

Ford F.N dropped 6.7%, retreating from a near 21% surge over the last two sessions on optimism over the automaker's energy storage business.

Declining issues outnumbered advancers by a 3.78-to-1 ratio on the NYSE. There were 88 new highs and 146 new lows on the NYSE.

On the Nasdaq, 1,163 stocks rose and 3,484 fell as declining issues outnumbered advancers by a 3-to-1 ratio.

The S&P 500 posted 12 new 52-week highs and 27 new lows while the Nasdaq Composite recorded 47 new highs and 132 new lows.