Why SoundHound AI Stock Is Plummeting Today

SoundHound AI (NASDAQ: SOUN) stock is seeing big sell-offs in Thursday's trading. The company's share price was down 12.3% as of 11:30 a.m. ET. Meanwhile, the S&P 500 index was up 0.6%, and the Nasdaq Composite index was up 0.7%.

Despite being down big as of this writing, SoundHound AI stock actually started the day with big gains. The conversational artificial intelligence (AI) specialist's share price had been up as much as 14.1% earlier in the session.

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Why SoundHound AI stock is highly volatile today

SoundHound AI stock rocketed higher at the start of today's trading. The company's valuation had been soaring this week thanks to bullish coverage from Wedbush analyst Daniel Ives and the participation of Chief Financial Officer Nitesh Sharan in a conference call hosted by Northland yesterday afternoon. But then investors got some bearish macroeconomic news.

The Federal Reserve announced another 25-basis-point cut for the benchmark interest rate yesterday, but Chairman Jerome Powell gave some commentary that was more hawkish than investors had anticipated. For starters, Powell said that the decision to deliver the rate cut was not necessarily an easy one.

While significant progress has been made on combating inflation, only two additional rate cuts are now expected in 2025 -- half of the four that investors had expected and hoped for. SoundHound AI still managed to close out yesterday's trading in the green, but the near-term trading outlook appears to have shifted.

What comes next for SoundHound AI stock?

Yesterday's interest-rate news may have instigated a significant pivot in the market's approach to growth stocks. While many large-cap stocks are seeing some valuation rebounds today, smaller companies with speculative and highly growth-dependent valuations are broadly seeing some significant pullbacks. Considering the less favorable outlook on rate cuts for next year, investors are taking money out of some of these riskier trades.

With the pivot, SoundHound AI may also be seeing an increase in short-selling. Even with today's pullback, the company's share price has risen 759% across 2024's trading -- and the software specialist is valued at roughly 80 times this year's expected sales.

SoundHound AI's share price has soared recently, and some investors have been playing bets against the stock. This can have the effect of pushing the company's share price lower, particularly if investors are broadly betting that the recent run for speculative growth stocks may be coming to an end.

Alternatively, it's possible that continued gains for the company's stock could open the door for a short-squeeze scenario. If the software-specialist's share price moves higher, short-sellers may be forced to buy back their shares in order to minimize their losses. This buying action can have the effect of pushing the stock even higher, which can trigger even more buying from short-sellers and other investors.

With these dynamics in mind, SoundHound AI stock will likely continue to be very volatile in the near term. While the company could see a return to strong bullish investment, the stock remains high risk, even with today's pullback.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.