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

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

Wall Street extended its decline on Friday as a pullback on stocks associated with the AI boom morphed into a broader risk-off sentiment. Semiconductor shares initially spearheaded the selloff before the downward pressure spread across the wider market.

All three major U.S. stock indexes closed lower for the day and posted weekly losses. The Philadelphia SE Semiconductor Index endured its steepest weekly loss in over a year, having tumbled nearly 18% so far in July.

Despite this recent volatility, the index remains up approximately 65% year-to-date. This significantly outpaces the S&P 500, which has seen a nearly 9% gain over the same period.

Chip Fatigue and AI Spending Concerns​

Some investors in the artificial intelligence space have begun positioning for a potential slowdown in the nearly trillion-dollar spending boom. Reuters analysis indicates that some active managers are already scaling back their exposure to these high-growth names.

Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska, described the current environment as chip fatigue. He noted that chip stocks have declined in three of the last four weeks as investors worry that these stocks got way ahead of themselves and are now coming back to Earth.

The S&P 500 lost 75.99 points, or 1.01%, to end at 7,457.78 points. The Nasdaq Composite fell 370.83 points, or 1.40%, to 25,511.12, while the Dow Jones Industrial Average dropped 394.01 points, or 0.75%, to 52,158.96.

Energy Sector Resilience Amidst Geopolitical Tensions​

While technology faced headwinds, energy stocks emerged as the biggest gainers among the major sectors of the S&P 500. These gains were fueled by spiking crude prices amid signs of escalating hostilities in the Iran war.

On the economic front, a mixed bag of data emerged during the session. Consumer sentiment rose to a five-month high in July, though this was tempered by a dip in single-family housing starts and building permits. Industrial output saw a marginal increase of 0.1%.

Robust Start to Q2 Earnings Season​

The second-quarter earnings season has seen an upbeat start with 49 companies in the S&P 500 reporting so far. According to LSEG, 90% of these companies have delivered better-than-expected results.

Analysts have subsequently raised year-on-year S&P 500 earnings growth projections to 26.0% in aggregate, up from the 19.2% expectations recorded as of April 1. Detrick highlighted that banks have started the season on the right foot.

However, individual corporate reports were not universally positive. Netflix tumbled following a weaker-than-expected earnings forecast, while Uber Technologies dropped after announcing a nearly $15 billion acquisition of Germany's Delivery Hero. Intuitive Surgical shares also slid as the company warned that insurance-plan changes could delay patient care.