The world’s largest technology companies experienced significant declines as concerns over tighter US restrictions on chip sales to China triggered a selloff in the industry. This sector has been leading the bull market in stocks.
Chipmakers across the globe faced intense pressure. In the US, industry giants Nvidia, Advanced Micro Devices, and Broadcom saw a nearly 7% drop in a key semiconductor index, marking the biggest decline since 2020. In Europe, ASML Holding NV fell over 10% despite reporting strong orders. In Asia, Tokyo Electron led losses in the Nikkei 225 Stock Average.
This market activity continued a trend where capitalization-weighted indexes underperformed the average stock due to weaknesses in dominant megacaps. Major firms like Apple and Microsoft, each comprising 7% of the S&P 500, saw losses that were difficult to offset even as most index members were up.
The Biden administration informed allies it is considering severe restrictions if companies like Tokyo Electron and ASML continue to provide China with advanced semiconductor technology. Matt Maley at Miller Tabak + Co. remarked, “This news on the chip front is the kind of unforeseen occurrence that could trigger a tradable correction in the stock market.”
The S&P 500 fell 1.4%, and the tech-heavy Nasdaq 100 experienced its worst day since 2022. A Bloomberg index of the “Magnificent Seven” megacaps slipped about 3.5%, and the Russell 2000 of smaller firms dropped 1.1%. Wall Street’s “fear gauge,” the VIX, reached its highest level since early May. United Airlines Holdings also issued a bearish outlook late in the trading session.
Intel Corp. and Globalfoundries Inc. were notable exceptions, managing to avoid the selloff. Meanwhile, the Dow Jones Industrial Average climbed for a sixth straight day, setting another record. Financial shares outperformed, with U.S. Bancorp surging on solid results.
In the bond market, movements were minor. The Federal Reserve’s Beige Book indicated slight economic growth and cooling inflation. Federal Reserve Governor Christopher Waller stated the Fed is “closer” to cutting rates but not there yet. The yen led gains among major currencies, rising almost 1.5%.
The Biden administration faces a delicate situation. US companies argue that export restrictions to China have unfairly penalized them and are lobbying for changes. Allies, however, see little reason to adjust their policies with the US presidential election approaching.
In an interview with Bloomberg Businessweek, Donald Trump questioned whether the US has an obligation to defend Taiwan, a key semiconductor manufacturing hub.
Bespoke Investment Group strategists noted that semiconductor stocks have been underperforming the broader market for several weeks, suggesting the impact of recent headlines might be more lasting.
After a strong first half driven by megacaps, the tech underperformance raises questions about whether the market can continue its upward trajectory without tech’s leadership. Jose Torres at Interactive Brokers highlighted that much of this year’s equity gains stemmed from a few names now under threat from political developments.
Goldman Sachs’ Scott Rubner expressed a bearish outlook, suggesting the S&P 500 may decline from here, citing historical data indicating mid-July often marks a turning point. Jonathan Krinsky at BTIG echoed this sentiment, stating the market is nearing the end of the typical bullish window, and further cautioning that any rotation out of megacap tech might not establish new leadership until after a higher correlation correction.
This week’s developments underscore the volatility and uncertainty in the tech sector as geopolitical tensions and economic policies continue to impact market dynamics.
Main Image: CNBC
