Nasdaq drops 1.5% as semiconductor selloff deepens AI rotation fears

The Nasdaq Composite fell 1.5% on Thursday as a selloff in semiconductor stocks erased gains from record TSMC earnings and Dallas Fed President Lorie Logan called for higher interest rates.

The S&P 500 fell 0.5% to 7,533.77 and the Nasdaq dropped 1.5% to 25,881.95 as a selloff in chip stocks deepened, with the PHLX Semiconductor Index sliding 4.3%.

"Hedge funds are taking profits after an extraordinary run in AI-related names," Goldman Sachs said in a note Wednesday, adding that aggregate net exposure to its broad AI basket had fallen to the lowest level this year.

The Dow Jones Industrial Average lost 105.67 points, or 0.2%, to 52,552.97. Declining issues outnumbered advancing ones 1,215 to 1,515 on the New York Stock Exchange. Chip companies Sandisk, Seagate, Micron, Intel and Advanced Micro Devices all lost ground. The selloff came even as Taiwan Semiconductor Manufacturing posted its fifth consecutive quarter of record earnings, with profit jumping 77%.

The combination of rising Treasury yields, a stronger dollar and the first explicit call for a rate hike from a Fed policymaker under Chairman Kevin Warsh is testing the durability of the AI trade that has powered much of this year's equity gains. The Federal Open Market Committee meets July 28-29, with futures markets pricing just a 10% probability of a move.

The 10-year Treasury yield rose 2.2 basis points to 4.568%, while the WSJ Dollar Index gained 0.2%. Gold fell 1.4% to $3,985.60 a troy ounce, its lowest settlement in more than eight months, as higher real yields reduced the metal's appeal. Brent crude slipped 0.8% to $84.23 a barrel as the Wall Street Journal reported President Trump is leaning toward expanding U.S. military operations in Iran.

Logan, a voting member of the FOMC, said in prepared remarks in Houston that "modestly higher interest rates would better balance the outlook and risks" for the central bank's dual mandate. "The labor, consumption and financial data indicate that monetary policy is not restraining the economy," she said. The current policy rate stands at 3.50% to 3.75%.

Retail sales rose 0.2% in June, slowing from a revised 1% gain in May, the Commerce Department said. The deceleration largely reflected lower gasoline prices during the Iran ceasefire, with spending at gas stations falling 5.3%. Excluding gas stations, retail spending rose 0.7%.

UnitedHealth Group raised its earnings forecast, sending shares up 1.2%. GE Aerospace also lifted its outlook but said supply-chain constraints continue to cause production delays, sending its shares down 4.1%. Eli Lilly agreed to acquire psychedelic drug developer AtaiBeckley for an initial $2.8 billion, with contingent payments that could bring the total to $3.8 billion.

The average 30-year fixed mortgage rate climbed to 6.55%, its highest level in nearly a year, according to Freddie Mac, as stubbornly high financing costs continued to weigh on the housing market.

This article is for informational purposes only and does not constitute investment advice.