Dow jumps 1.2% as semiconductor rout deepens on AI spending fears

The Dow Jones Industrial Average rose 1.19% on July 28 while the Nasdaq Composite erased a 1.4% intraday decline to close positive, as investors rotated out of semiconductor stocks into defensive sectors. The S&P 500 gained 0.39%, with consumer staples and healthcare leading while technology lagged.

"The rotation out of AI hardware into defensive sectors reflects growing skepticism about the timeline for monetizing massive infrastructure spending," the ValuEngine research team said in a weekly note. The firm said the earnings period showed "extreme polarization" between high-spending technology names and companies with strong operational execution and guidance upgrades.

Semiconductor stocks suffered broad losses across the sector. Micron Technology Inc. fell 9.12%, Advanced Micro Devices Inc. dropped 7.94%, and LAM Research Corp. declined 8.94%. Intel Corp. lost 5.79%, SK Hynix Inc. slid 7.12%, and Arm Holdings Plc fell 7.2%. ASML Holding NV dropped 4.57% and Taiwan Semiconductor Manufacturing Co. declined 2.32%. On the winning side, Coca-Cola Co. surged 6.08%, Walmart Inc. gained 2.67%, and Berkshire Hathaway Inc. rose 2.21%. Mega-cap technology stocks also recovered from early losses: Microsoft Corp. added 2.8%, Alphabet Inc. rose 1.76%, Apple Inc. gained 0.7%, and Nvidia Corp. edged up 0.5%.

The selloff in semiconductors coincided with the Federal Reserve's two-day policy meeting starting July 28 and a busy earnings week that includes reports from Microsoft and Meta Platforms Inc. on Wednesday. West Texas Intermediate crude fell to near $81 a barrel after diplomatic progress between the U.S. and Iran, easing near-term inflation concerns and supporting consumer and transportation stocks. The divergence between defensive sectors and semiconductor names suggests investors are repricing AI hardware exposure ahead of key earnings that will test whether hyperscalers can justify their capital expenditure trajectory.

The rotation extended a trend from the prior week, when the Nasdaq 100 ETF declined 1.71% while utilities, energy, and healthcare sectors posted gains, according to ValuEngine data. The S&P 500 ETF slipped 0.46% for the week ending July 24, with consumer discretionary and communication services the worst performers. Utilities gained 3%, energy rose 2.9%, and industrials added 2.55% during that period.

The global selloff in chip stocks was triggered by severe overnight losses in Asian markets, including a 10% limit-down move on South Korea's Kospi index driven by SK Hynix and Samsung Electronics. That weakness bled into U.S. pre-market trading before selective buying in mega-cap technology names helped stabilize the broader indices. Dow futures had pointed to a 121-point gain ahead of the opening bell as the rotation into blue-chip value stocks gathered pace.

The selling pressure on semiconductor names reflects a broader reassessment of the AI trade. Investors have grown increasingly skeptical of what some analysts describe as "circular financing" deals among hyperscalers and chip companies, where spending on AI infrastructure has yet to translate into proportional revenue growth. The prior week's earnings from Tesla Inc. and Alphabet Inc. set a cautious tone: Tesla plunged 18.3% after a 38% miss on adjusted earnings per share, while Alphabet fell 6.9% despite a strong revenue beat, as investors penalized its capital expenditure increases.

Investors are now focused on the Fed's policy statement on July 29 and earnings from Microsoft and Meta, which will provide the clearest signal on whether AI infrastructure spending is generating returns. Apple reports on Thursday, adding another layer of scrutiny to the technology sector outlook. The simultaneous convergence of monetary policy and corporate earnings creates a high-stakes environment for equity positioning heading into the final week of July.

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