Big Tech stocks dive to halt Wall Street’s record-setting rally

Wall Street’s record-breaking rally ran into a wall Wednesday, as worries about potentially worsening trade tensions with China hit stocks of chip companies. That dragged indexes to their worst day in months, but conditions may have been less discouraging underneath the surface.

The Standard & Poor’s 500 index slumped 1.4% a day after setting an all-time high for the 38th time this year. Losses for Nvidia and other Big Tech heavyweights also dragged the Nasdaq composite to a loss of 2.8%, its worst drop since 2022.

But slightly more stocks in the S&P 500 nevertheless rose than fell, and the Dow Jones industrial average rose0.6% from its record set a day earlier.

The mix offered a continuation of a recent trend that market watchers have called encouraging, one in which more stocks are rising rather than just a handful of dominant elites. The smaller stocks in the Russell 2000 were coming off a big five-day winning streak on hopes that interest rates are about to get easier and the U.S. economy will avoid a recession, though the index fell 1.1% on Wednesday to hand back some of the gains.

The market’s spotlight was squarely on chip companies, which tumbled after a report from Bloomberg News said President Biden is considering the most severe trade restrictions available if companies such as the Netherlands’ ASML and Japan’s Tokyo Electron continue to ship advanced semiconductor technology to China. The U.S. government has blocked Chinese access to advanced chips and the equipment to make them, citing security concerns, and urged its allies to follow suit.

ASML saw its U.S-traded shares drop 12.7% even though it reported sales for the spring that came in at the high end of its forecast range. Shares of Tokyo Electron, meanwhile, dropped 7.5% in Tokyo to cull its gain for the year to 32.2%.

Another major chip company, Taiwan Semiconductor Manufacturing Co., sank after former President Trump criticized the self-governed island claimed by Beijing, which the U.S. is obligated by treaty to defend if it is attacked.

“Taiwan should pay us for defense,” Trump said according to a transcript of an interview published by Bloomberg. “Taiwan took our chip business from us, I mean, how stupid are we?” he said.

Taiwan Semiconductor’s U.S.-traded shares fell 8%.

Reverberations reached chip stocks around the world, including big U.S. players that have been some of Wall Street’s biggest stars this year amid a frenzy around artificial intelligence technology. Nvidia fell 6.6% after soaring 155.2% this year through Tuesday.

Advanced Micro Devices fell 10.2%, and Broadcom dropped 7.9%.

Big Tech stocks’ movements have an outsized effect on indexes such as the S&P 500, which give more weight to companies of bigger size. That was a boon in recent years, when a small group of companies known as “the Magnificent Seven” was able to soar almost regardless of what the overall economy and interest rates were doing. That helped mask weakness underneath the surface as the economy struggled through high interest rates meant to snuff out inflation.

Now, though, some critics call those Magnificent Seven stocks too expensive, and investors are creeping back into unloved areas of the market. The economy has remained resilient, with the job market staying solid, and investors widely expect the Federal Reserve to begin cutting interest rates in September because inflation has slowed.

“Markets cannot continue indefinitely higher on the backs of just a handful of stocks,” said JJ Kinahan, chief executive of IG North America.

Johnson & Johnson, whose stock is down for the year, climbed 3.7% after topping analysts’ forecasts for profit in the latest quarter. It was one of the largest reasons the Dow was able to rise despite drops of at least 1% for each of the Magnificent Seven stocks: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

U.S. Bancorp, which has also lagged behind the rest of the market this year, rallied 4.6% after topping analysts’ forecasts for profit and revenue.

On the losing side of Wall Street was Five Below, a retailer targeting teens and tweens with products priced at $5 or less. It tumbled 25.1% after its CEO, Joel Anderson, stepped down from his job and from the board. It also gave a profit forecast for the second quarter that fell short of analysts’ expectations.

Spirit Airlines lost 10.8% after the discount carrier cut its forecast for revenue in the second quarter. It said it’s making fewer dollars than expected from fees outside of tickets.

All told, the S&P 500 fell 78.93 points to 5,588.27. The Dow climbed 243.60 points to 41,198.08, and the Nasdaq composite sank 512.42 points to 17,996.92.

In the bond market, the 10-year Treasury yield slipped to 4.14% from 4.16% late Tuesday.

In stock markets abroad, London’s FTSE 100 rose 0.3% after data showed that inflation remained steady at the Bank of England’s 2% target rate in June. Indexes were mixed elsewhere across Europe and Asia.

Choe writes for the Associated Press