U.S. stocks exhibited mixed performance on Wednesday, with the tech-heavy Nasdaq suffering significant losses due to concerns over U.S. export restrictions on China and former President Donald Trump’s remarks regarding Taiwan. In contrast, the Dow Jones Industrial Average closed at a record high.
The Nasdaq Composite fell over 2.7%, marking its steepest drop since December 2022, while the S&P 500 dropped more than 1.3%. The Dow, however, gained about 0.6%, finishing at 41,198—its first close above 41,000.
Tech Sector Faces Major Headwinds
Shares of United Healthcare rose more than 4%, extending gains from the previous day, while Johnson & Johnson increased over 3%, helping to lift the Dow. However, the broader tech sector struggled, overshadowing recent optimism about potential interest rate cuts. Major players like Nvidia saw declines of more than 6%, reflecting broader concerns about the sector’s future.
The Biden administration is contemplating stricter limitations on advanced chip technology exports to China, which intensified market worries. Shares of ASML fell over 12%, despite reporting strong quarterly earnings, as the company was identified as a potential target for these restrictions.
Additionally, Trump’s recent comments about U.S. defense support for Taiwan raised further alarm. He suggested Taiwan should compensate the U.S. for its defense, contributing to nearly an 8% drop in TSMC’s stock.
S&P 500 and Sector Performance
The S&P 500’s decline was largely driven by the technology sector, which fell nearly 4%, its worst daily performance in several months. Despite this downturn, eight of the 11 sectors within the index managed to perform better than the S&P 500 overall, indicating a potential shift in market dynamics.
“We could see a churn where some stocks are passing the baton to others,” said Callie Cox, chief market strategist at Ritholtz Wealth Management. This rotation could help stabilize the rally, although it may slow price growth in the short term.
Earnings Season Shows Promise
As the second quarter earnings season progresses, early reports indicate that S&P 500 companies are performing better than expected. According to Evercore ISI, 27 companies have released their earnings, showing a 5.4% increase in sales growth and a 16.7% rise in earnings year-over-year.
Market Sentiment Towards Trump’s Potential Election Victory
In a separate development, markets have begun pricing in the possibility of Trump winning the 2024 presidential election, leading to speculation about looser regulations on mergers and acquisitions. Stocks of major M&A players like Evercore and Lazard have seen significant gains in recent sessions.
Federal Reserve Under Pressure
Trump’s comments have also intensified scrutiny on the Federal Reserve’s monetary policy as interest rate cuts loom on the horizon. In a recent Bloomberg interview, he urged the Fed not to ease monetary policy before the November elections. Fed officials, including Governor Chris Waller, have indicated that the time for cuts is approaching, despite the political pressure.
Broader Market Context
As investors rotate out of big tech and into smaller-cap stocks, the Russell 2000 has outperformed the Nasdaq 100 for five consecutive sessions. The small-cap index dipped less than 1% on Wednesday, while the Nasdaq fell more than 2%.
In the broader economic landscape, a Bank of America survey revealed that 68% of fund managers now believe a “soft landing” for the global economy is likely, reflecting growing confidence despite ongoing geopolitical tensions.
Construction Trends
In housing news, residential construction increased in June, with housing starts rising 3% to a seasonally adjusted annual pace of 1.35 million units. However, experts caution that this uptick is primarily driven by multifamily projects, with single-family construction experiencing declines.
As the market navigates these challenges, the interplay of geopolitical developments, corporate earnings, and investor sentiment will be crucial in shaping the direction of U.S. stocks in the coming weeks.
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