(Reuters) – 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.

(Reporting by Noel Randewich; Editing by Richard Chang)