Concerns Over Trade Restrictions
Big Tech Stocks Dive Again to Halt Wall Street's Record-Setting Rally
Bond Market and Global Stock Performance
NEW YORK— Wall Street's record-breaking rally encountered significant setbacks on Wednesday as concerns over potential trade tensions with China impacted chip company stocks, leading to the worst day in months for major indexes.
The S&P 500 dropped 1.3%, just a day after setting an all-time high for the 38th time this year. The Nasdaq Composite slumped 2.6%, marking its worst day since 2022, largely due to losses in market heavyweights like Nvidia and Apple.
However, beneath the surface, the situation was less discouraging. More stocks in the S&P 500 rose than fell, and the Dow Jones Industrial Average gained 234 points, or 0.6%, reaching a new record as of 3:20 p.m. Eastern Time. This pattern continues a recent trend where a broader range of stocks is rising, not just a select few dominant players. Smaller stocks in the Russell 2000, despite falling 0.8% Thursday, recently experienced a five-day winning streak fueled by hopes for easing interest rates and the avoidance of a recession in the U.S. economy.
Concerns Over Trade Restrictions
The market spotlight was on chip companies following a Bloomberg News report that President Joe Biden is considering the most severe trade restrictions if companies like the Netherlands' ASML and Japan's Tokyo Electron continue to supply advanced semiconductor technology to China. The U.S. government has already restricted Chinese access to advanced chips and related equipment, citing security concerns, and has urged its allies to do the same.
ASML's U.S.-traded shares fell 12.7%, despite reporting spring sales at the high end of its forecasted range. Tokyo Electron's shares dropped 7.5% in Tokyo, reducing its year-to-date gains to 32.2%.
Another major chip company, Taiwan Semiconductor Manufacturing Co. (TSMC), saw its stock fall after former President Donald Trump criticized the self-governed island claimed by Beijing. Trump suggested that Taiwan should pay for U.S. defense support, saying, “Taiwan took our chip business from us, I mean, how stupid are we?” TSMC’s U.S.-traded shares dropped 7.3%.
Global Impact on Chip Stocks
The reverberations of these concerns reached chip stocks globally, including major U.S. players that have been key to Wall Street’s performance this year amid a frenzy around artificial intelligence technology. Nvidia fell 6.1%, Advanced Micro Devices dropped 8.8%, and Broadcom declined 7%.
Movements in big tech stocks significantly impact indexes like the S&P 500, which give more weight to larger companies. This has been beneficial in recent years as a small group of companies known as "the Magnificent Seven" soared, masking underlying economic weaknesses. However, some critics now consider these stocks overpriced, prompting investors to return to previously overlooked market areas. Despite high interest rates meant to curb inflation, the economy has remained resilient with a strong job market. Investors widely expect the Federal Reserve to begin cutting interest rates in September as inflation has slowed.
“Markets cannot continue indefinitely higher on the backs of just a handful of stocks,” said JJ Kinahan, CEO of IG North America.
Other Market Movers
Johnson & Johnson, whose stock had been down for the year, jumped 3.7% after exceeding analysts’ profit forecasts for the latest quarter. This gain significantly contributed to the Dow Jones Industrial Average's rise, despite falls in each of the Magnificent Seven stocks: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
U.S. Bancorp, which has lagged the market this year, rallied 4.4% after surpassing analysts’ profit and revenue expectations.
On the losing side, retailer Five Below tumbled 24.3% after CEO Joel Anderson stepped down and the company issued a profit forecast for the second quarter that fell short of expectations. Spirit Airlines lost 11.4% after lowering its revenue forecast for the second quarter, citing lower-than-expected income from non-ticket fees.
Bond Market and Global Stock Performance
In the bond market, the 10-year Treasury yield dipped to 4.15% from 4.16% late Tuesday. Internationally, London’s FTSE 100 rose 0.3% after data showed inflation remained steady at the Bank of England’s 2% target in June. Elsewhere, indexes across Europe and Asia were mixed.