The Dow surged 537 points while the Nasdaq slumped, as the deepest sector rotation in months drove money out of chip stocks and into defensive value plays.
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Dow surges 1% as sector rotation deepens, Nasdaq falls on chip rout
The Dow Jones Industrial Average climbed 1% to 52,747.32 on Tuesday, extending its divergence from the Nasdaq Composite as a rotation out of semiconductor stocks deepened ahead of the Federal Reserve's two-day policy meeting.
"The market is repricing AI optimism after CXMT's blockbuster IPO highlighted the threat of Chinese competition in chips," said Sarah Lin, equity strategist at Edgen. "Traders are rotating into defensives and rate-sensitive names while they wait for the Fed's decision."
The S&P 500 rose 0.2% to 7,428.78, with 75% of its components advancing even as the benchmark struggled for direction. The Nasdaq fell 0.2% to 24,876.91, its fourth straight loss, after dropping as much as 1.4% earlier in the session — a recovery that would have marked its biggest comeback since April had it closed positive. The Dow added 537 points, led by Sherwin-Williams after the paint maker posted strong earnings. The Russell 2000 index of small-cap stocks rose 0.2% to 2,953.80, reflecting the broadening of the rally beyond mega-cap names.
Health care and consumer staples led the S&P 500's 11 sectors, while energy and technology lagged. "Software continues to benefit from the rotation away from semis, helped by lower rates following the move lower in crude," said Daniel O'Regan, strategist at Mizuho. "Relative performance remains solid, but I wouldn't characterize the flows as particularly aggressive." Semiconductor stocks bore the brunt of the selling: Sandisk, Micron Technology, Western Digital and Advanced Micro Devices all fell sharply. The selloff rippled into Asian markets overnight, with South Korea's Kospi plunging more than 10% as Samsung Electronics and SK Hynix dropped on concerns that CXMT's $8.6 billion Shanghai IPO signals a new wave of Chinese competition in memory chips. Tokyo's Nikkei 225 fell 4% to 62,350.18, and Taiwan's Taiex slid 3.9%. Hong Kong's Hang Seng edged 0.1% lower to 25,178.21, while the Shanghai Composite lost 1% to 3,820.52.
The Cboe Volatility Index edged lower to 18.21, suggesting the selloff remained orderly despite its breadth. The U.S. 10-year Treasury yield ticked up to 4.62%, while the dollar index slipped to 101.37. Oil futures fell as hopes for U.S.-Iran negotiations tempered supply fears, with WTI crude settling at $82.73 a barrel after earlier declines. Apple reclaimed the title of the world's most valuable company during the session, though the crown may not last given the rotation out of mega-cap tech.
The Federal Open Market Committee began its two-day meeting Tuesday, with traders pricing a 31.5% chance of a surprise rate hike, according to the CME FedWatch Tool. A hawkish outcome could accelerate the rotation out of growth stocks, while a hold would likely reinforce the defensive bid that lifted the Dow to its strongest session relative to the Nasdaq in months. The next catalyst for direction arrives Wednesday afternoon when the Fed announces its decision.
This article is for informational purposes only and does not constitute investment advice.
