(Bloomberg) — Shares in the semiconductor industry, which had been driving the bull market, fell from record highs on concerns about tougher U.S. restrictions on semiconductor exports to China.
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From the U.S. to Europe to Asia, chipmakers are under immense pressure. Shares in U.S. giants Nvidia, Advanced Micro Devices and Broadcom dragged the closely watched semiconductor index down 5%. Across the Atlantic, Dutch giant ASML Holdings slumped more than 10% despite reporting strong orders. These moves followed a sharp drop in Tokyo Electron, which led a decline in Japan’s Nikkei average.
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The Biden administration has told allies it is considering tougher restrictions if companies like Tokyo Electron and ASML continue to give China access to advanced semiconductor technology. The U.S. is also considering additional sanctions against certain Chinese semiconductor companies with ties to Huawei Technologies.
“This news on semiconductors is definitely the kind of UFO that could create a sell-off that could trigger a tradable correction in the stock market,” said Matt Murray of Miller, Tabak & Co. “The broader indexes are overbought.”
Wednesday’s gains replicated a recent trend of market-cap-weighted indexes performing significantly worse than average stock prices, driven by weakness in the giant tech companies that make up the majority of the index. With companies like Apple and Microsoft each making up 7% of the S&P 500, gains by most of the index’s constituents are struggling to offset the losses.
The S&P 500 fell more than 1%, while the Nasdaq 100 dropped 2.5%. An index of mega-cap stocks known as the “Magnificent Seven” fell 3%. The Russell 2000 index of smaller companies lost 1%. The VIX, Wall Street’s “fear gauge,” surged toward its highest level since early May.
Among the few chipmakers that resisted the selling pressure were Intel Corp. and GlobalFoundries Corp. The Dow Jones Industrial Average rose for a sixth straight day to a new record. Financial stocks fared well, with U.S. Bancorp surging after strong earnings.
The yield on the 10-year U.S. Treasury note was little changed at 4.15%. The dollar fell against most major currencies, while the yen rose 1.3%.
The Biden administration is in a delicate position: U.S. companies feel that export restrictions on China unfairly harm them and are pushing for reform, while allies see little reason to change policy with the presidential election just months away.
“Typically, the impact of this kind of news is short-lived, but in this case we can point to the semiconductor sector having underperformed the broader market over the past few weeks,” said a strategist at Bespoke Investment Group. “This is something to watch.”
Tech’s underperformance comes after a first half in which large caps like Nvidia, Microsoft and Alphabet buoyed the market, pushing up their valuations and setting up tough times for the rest of 2024.
“I don’t buy low,” said Scott Rabner of Goldman Sachs Group Inc.
The tactical strategist sees the S&P 500 can only go down from here, as Wednesday, July 17, historically marks a turning point in the equity benchmark’s returns, he said, citing data stretching back to 1928. Then comes August, which he said is typically the heaviest month for outflows from passive stocks and mutual funds.
BTIG’s Jonathan Krinsky says the market is “nearing the end of a classic bull market.”
He noted that sentiment on survey and trading indicators remains highly optimistic.
“The shift from large tech stocks to cyclicals and small caps is encouraging, but it feels a bit far-fetched to happen in the short term,” Krinsky said. “Even if this is a longer-term shift, we won’t see any new leadership until we see a correction in correlations build up and see what leads emerge from that.”
Company Highlights:
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Tesla’s creation of a self-driving taxi platform would be a catalyst for a roughly tenfold rise in the company’s stock price, said Cathie Wood of Ark Investment Management, echoing long-standing bullish predictions about the business the company has yet to launch.
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Boeing Co.’s largest labor union held a rally and strike vote on Wednesday, ratcheting up pressure on company negotiators as contract talks enter a critical phase ahead of a possible strike in September.
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Amazon.com Inc.’s marketing portal for sellers crashed Tuesday night, wiping out one of the online retailer’s biggest sales of the year, according to several Amazon sellers and consultants.
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Morgan Stanley on Wednesday became the latest big Wall Street bank to enter the U.S. investment-grade bond market after reporting earnings, as strong investor demand allows lenders to borrow at lower yields than was possible at the start of the month.
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State Street Corp. will issue new preferred stock on Wednesday, a day after its financial chief warned it would accelerate the pace of share buybacks.
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The chief executive officer of Cassava Sciences has resigned, the latest turmoil at the biotech company under investigation by a U.S. watchdog.
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Johnson & Johnson’s second-quarter profit beat Wall Street expectations on strong drug sales, but the company lowered its full-year outlook to account for a string of recent acquisitions.
Major events this week:
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ECB interest rate decision Thursday
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US initial jobless claims, Philadelphia Fed manufacturing index, Conference Board LEI, Thursday
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Federal Reserve Board members Mary Daly, Laurie Logan and Michelle Bowman to speak Thursday
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Fed’s John Williams and Raphael Bostic to speak on Friday
Some of the key market developments:
stock
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The S&P 500 was down 1.4% as of 2:07 p.m. New York time.
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The Nasdaq 100 fell 2.8%
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The Dow Jones Industrial Average rose 0.4%.
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MSCI World Index down 1%
currency
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The Bloomberg Dollar Spot Index fell 0.3%.
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The euro rose 0.3% to $1.0932.
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The British pound rose 0.2% to $1.3004.
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The Japanese yen rose 1.2% to 156.40 yen to the dollar.
Cryptocurrency
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Bitcoin fell 0.5% to $64,363.45.
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Ether fell 0.8% to $3,413.25.
Bonds
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The yield on the 10-year Treasury note was little changed at 4.15%.
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German 10-year government bond yields were little changed at 2.42%
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UK 10-year government bond yields rose 3 basis points to 4.08%.
merchandise
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West Texas Intermediate crude rose 2.3% to $82.61 a barrel.
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Spot gold fell 0.7% to $2,452.30 an ounce.
This story was produced with assistance from Bloomberg Automation.
–With assistance from Cecile Gutscher and Sujata Rao.
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