Treasury yields continued to surge on sticky inflation data, dragging the market down today. Tech and artificial intelligence (AI) stocks bore the brunt of the sell-off, as the Nasdaq Composite fell nearly 2%, more than the other major market indexes.

Shares of electric vehicle makers Tesla (TSLA 0.36%) and Rivian Automotive (RIVN -5.05%) fell roughly 4% and 5%, respectively. Meanwhile, shares of artificial intelligence semiconductor company Broadcom (AVGO 0.22%) fell 3.3%.

High yields not going away

With the first full week of the year underway, economic data is back on the calendar. New data today supports the belief that inflation will remain stickier than expected and perhaps even persistent, making it difficult for the Federal Reserve to continue to lower interest rates.

The services Purchasing Managers' Index, which shows the health of the services sector in the U.S., came in at 64.4 in December, up over 4 points from the prior month and the highest level seen since January. Meanwhile, the Job Openings and Labor Turnover Survey (JOLTS) also came in higher than expected.

Traders betting on rate cuts now view a rate cut in January as very unlikely while 60% of traders think the Fed will hold interest rates where they are at the agency's March meeting as well. That number came in at less than 57% just yesterday and only 47% a week ago. The yield on the 10-year U.S. Treasury moved to nearly 4.69%.

In more company-specific news, analysts at Bank of America downgraded Tesla from a buy rating to hold, despite lifting their price target from $400 to $490. Analyst John Murphy believes that investors have now priced in positive catalysts such as the possibility of autonomous vehicles. The share price more than adequately reflects this business but Tesla still has work to do to make it a reality, Murphy wrote.

Other analysts, however, are more bullish on Tesla. New Street Research analyst Pierre Ferragu upgraded the company to a buy rating and Stifel analyst Stephen Gengaro reiterated his buy rating, naming Tesla one of his favorite stocks in 2025. Both analysts think Tesla can lower costs, produce more affordable vehicles, stabilize its gross margin, and have further opportunities in the autonomous business.

Look ahead to Friday

Most of the sell-off in tech today appears related to the macro environment, and new data supporting sticky inflation and a strong economy that could keep yields elevated. With the market and most tech stocks trading at sky-high valuations, it's no surprise to see investors pushing the sell button. The silver lining is that the economic data continues to support an economy on sound footing. High yields supported by an expanding economy are not necessarily bad and could lead to stronger earnings, which could continue to support the market.

However, many investors also expected rate cuts this year, so stocks may be pressured if those don't materialize. Remember, investor sentiment can change quickly and more economic data is on tap this week. ADP's private sector jobs data comes out tomorrow, but the real show will be on Friday when December's nonfarm payroll jobs data is released. A weak reading of the jobs report could send yields lower, although investors may not react favorably if they grow concerned about a recession.

I'm currently on the sidelines when it comes to highly valued tech and AI stocks like Tesla, Broadcom, and Rivian. The enormous potential of the AI market may lead investors in a different direction, but stocks with higher valuations are more susceptible to sell off on bad news.