Wall Street Plummets as Chip Selloff Triggers Broad Market Risk-Off Sentiment

Wall Street Plummets as Chip Selloff Triggers Broad Market Risk-Off Sentiment​

Wall Street extended its downward trajectory on Friday as a pullback on stocks associated with the artificial intelligence boom transformed into a wider risk-off sentiment.

Semiconductor shares initially led the selling pressure, which quickly broadened across the broader market as the session progressed. All three major U.S. stock indexes closed lower on the day and posted losses for the week.

Semiconductor Bear Market Confirmed Amidst AI Fatigue​

The Philadelphia SE Semiconductor Index (SOX) logged its steepest weekly loss in over a year, tumbling over 18% so far in July. Despite this sharp decline, the index remains up nearly 65% year-to-date, significantly outperforming the S&P 500's nearly 9% gain over the same period.

The SOX closed 20.2% below its June 22 record closing high, confirming that the index has officially entered a bear market since that date. This correction comes as some investors in the artificial intelligence space begin positioning for a potential slowdown in the nearly trillion-dollar spending boom.

Ryan Detrick, chief market strategist at Carson Group, noted that the market appears to be experiencing chip fatigue. He observed that chip stocks have been down three of the last four weeks as these stocks were "coming back to Earth" after getting way ahead of themselves.

Major Indices and Magnificent Seven Performance​

The Dow Jones Industrial Average fell 406.55 points, or 0.77%, to close at 52,146.42. The S&P 500 lost 76.08 points, or 1.01%, to reach 7,457.69, while the Nasdaq Composite dropped 361.70 points, or 1.40%, to end at 25,520.24.

Among the Magnificent Seven group of AI-related megacaps, all but Apple saw declines. Meta and Alphabet suffered the most significant hits, falling 2.7% and 3.2% respectively.

In terms of sector performance within the S&P 500, communication services and consumer discretionary fell the most. Energy stocks were the sole gainers, propelled by spiking crude prices amid signs of escalating hostilities in the Iran war.

Corporate Earnings and Mixed Results for Tech Giants​

The second-quarter earnings season has seen a strong start, with 90% of the 49 companies currently reporting in the S&P 500 delivering better-than-expected results. Consequently, analysts have revised year-on-year S&P 500 earnings growth expectations from 19.2% in April to 26.0%.

However, individual corporate reports yielded mixed results for major players. Netflix tumbled 7.3% following a weaker-than-expected earnings forecast, while Uber Technologies dropped 2.1% after announcing its acquisition of Germany's Delivery Hero for nearly $15 billion.

Intuitive Surgical shares slid 14.2% after the company maintained its da Vinci procedure growth forecast and warned that insurance-plan changes could delay patient care. Detrick highlighted that while it is early in the season, banks have started the reporting cycle on a strong foot.

Economic Indicators and Market Breadth Analysis​

On the economic front, consumer sentiment reached a five-month high in July despite a dip in single-family housing starts and building permits. Industrial output showed only a meager increase of 0.1%.

Market breadth remained notably weak throughout the session. On the New York Stock Exchange, declining issues outnumbered advancers by a 1.94-to-1 ratio, with 258 new highs against 180 new lows.

On the Nasdaq, 3,019 stocks fell while 1,717 rose, representing a 1.76-to-1 ratio of decliners to advancers. Trading volume on U.S. exchanges stood at 17.55 billion shares, lower than the 20.87 billion average for the last 20 trading days.