On Wednesday, both the S&P 500 and Nasdaq experienced significant declines due to a sharp drop in microchip stocks, exacerbated by concerns over potential U.S. trade tensions with China. This downturn intensified the ongoing shift away from large-cap technology-related shares.



Microchip stocks plunged by 6.8% following reports that the Biden administration is contemplating stringent trade restrictions against China, marking the Philadelphia SE Semiconductor index's largest single-day decline since March 2020. Chuck Carlson, CEO of Horizon Investment Services, noted, "The narrative has shifted a little bit. The economy appears to be heading towards a soft landing, prompting a shift towards economically sensitive stocks."



Market expectations of a 93.5% probability of the Fed initiating rate cuts in September, according to CME's FedWatch tool, influenced sentiment. Despite this, some policymakers within the Federal Reserve acknowledged the nearing need for adjustments.


The Nasdaq fell by 2.8%, led by a retreat in the "Magnificent 7" momentum stocks like Nvidia and Apple, while the S&P 500 slid 1.4%. In contrast, the Dow Jones Industrial Average, which has trailed behind the other indices this year until recently, maintained a modest gain and achieved its third consecutive record closing high.



Key contributors to the Dow's performance included Johnson & Johnson, UnitedHealth Group, and Intel Corp., the latter defying the broader weakness in the chip sector. Michael Green, Chief Strategist at Simplify Asset Management, remarked, "(The sell-off) is being driven by pressure in the chip area, and for the first time, we're seeing it extend into small caps."


Separate reports indicated that industrial output in June exceeded expectations, aligning with recent indications of sustained U.S. economic resilience. The Federal Reserve's Beige Book, released the same day, reflected modest economic expansion from late May through early July, with signs of stability despite softening trends.



Among S&P 500 sectors, technology and communication services registered the largest declines, while consumer staples showed gains. Market breadth favored decliners over advancers, with a ratio of 1.39-to-1 on the NYSE and 1.66-to-1 on Nasdaq.


The session saw the S&P 500 with 82 new 52-week highs and no new lows, while the Nasdaq Composite recorded 251 new highs and 37 new lows. Trading volume on U.S. exchanges reached 12.47 billion shares, surpassing the 11.74-billion average for the last 20 trading days.