Stocks Settle Lower as Chipmakers and AI Stocks Slump
Stocks Settle Lower as Chipmakers and AI Stocks Slump.
The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.51%, the Dow Jones Industrial Average ($DOWI) (DIA) closed down -0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.62%. September E-mini S&P futures (ESU26) fell -0.50%, and September E-mini Nasdaq futures (NQU26) fell -1.58%.
Stock indexes settled lower on Thursday, with the Nasdaq 100 falling to a 1-week low. The weakness in chipmakers and AI-infrastructure stocks weighed on the overall market on Thursday amid concerns over whether massive artificial intelligence investments will justify current lofty valuations. Chipmakers had negative carryover pressure on Thursday from a -6% plunge in South Korea's Kospi Index, which was weighed down by sharp losses in SK Hynix and Samsung Electronics.
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Also weighing on the broader market on Thursday was weakness in cloud infrastructure stocks and a selloff in mining stocks after gold, silver, and copper prices slumped. In addition, Alphabet fell by more than -4% after Google was said to be months behind schedule in delivering its most powerful AI model.
While most chipmaking-related stocks retreated on Thursday, technology laggards such as software stocks rose as investors rotated into underperforming sectors. Also, trucking companies rallied after JB Hunt Transport Services reported stronger-than-expected Q2 revenue, and Abbott Laboratories soared by more than +10% after raising its full-year adjusted EPS forecast.
Thursday's US economic reports were generally positive for the economy but hawkish on Fed policy, pushing bond yields higher; the 10-year T-note yield is up by +2 bp to 4.57%.
US weekly initial unemployment claims unexpectedly fell -8,000 to a 10-week low of 208,000, showing a stronger labor market than expectations of an increase to 217,000.
US Jun retail sales rose +0.2% m/m, right on expectations. However, Jun retail sales ex-autos fell -0.2% m/m, weaker than expectations of -0.1% m/m.
The US Jul Philadelphia Fed business outlook survey rose +31.1 to a 4.5-year high of 41.4, stronger than expectations of 12.5.
US Jun pending home sales fell -5.4% m/m, weaker than expectations of -0.5% m/m and the steepest decline in 6 months.
The US Jul NAHB housing market index unexpectedly fell -2 to 34, weaker than expectations of no change at 35.
Fed comments on Thursday were hawkish and negative for stocks and bonds. Kansas City Fed President Jeff Schmid said, "his primary concern is inflation, which is too hot and has been above target for too long. As such, my focus remains on inflation in setting the correct course for monetary policy." Also, Dallas Fed President Lorie Logan said, "I currently believe modestly higher interest rates would better balance the outlook and risks" for the Fed's dual mandate of price stability and full employment.
Geopolitical risks remain as the US launched fresh airstrikes on Iran and struck a sanctioned Iranian oil tanker in the Persian Gulf. Iran responded by firing upon American bases in Kuwait and Jordan, with the Jordanian government saying it intercepted eight missiles. President Trump pledged to intensify the bombardment until Iran stops attacking ships in the Strait of Hormuz and agrees to open the waterway.
The Wall Street Journal reported on Thursday that President Trump is leaning toward expanding military operations and discussed the seizure of Kharg Island, Iran's main oil export terminal. According to RBC Capital Markets LLC, a seven-day moving average of oil flows through the Strait of Hormuz has slumped to 3.9 million bpd from 8.5 million bpd before the collapse of the ceasefire.
The outlook for strong Q2 earnings, which began this week, is a bullish factor for stocks. Forecasts compiled by Bloomberg Intelligence suggest Q2 earnings may increase by +23%, close to Q1's blowout earnings of +30%, which was more than double the +12% analysts had expected. AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2.
The markets are discounting a 10% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.
