The S&P 500 remains firmly range-bound, while the Nasdaq 100 has temporarily moved below its recent consolidation.
The Dow 30, by contrast, is showing the strongest signs of a breakout to the upside.
That divergence provides a clear indication that sector rotation is taking place beneath the surface of the market.
Against that backdrop, attention now turns to the Federal Reserve’s interest-rate decision this afternoon, followed by one of the heaviest nights of earnings this quarter.
The market’s response to both should provide a clearer indication of whether the current rotation continues or begins to develop into broader weakness.
Markets are pricing in roughly a 70% probability that the Fed leaves rates unchanged, meaning a surprise hike cannot be ruled out.
Expectations for further tightening later this year have also increased. Fed Chair Kevin Warsh has taken a clear stance against forward guidance and excessive communication, so today’s decision may arrive with less commentary than markets have become accustomed to. That could leave price to absorb the outcome with limited guidance on what comes next.
In the meantime, earnings continue to hit the market. Microsoft, Meta and Qualcomm all report tonight, with investors looking for evidence that rapidly rising AI capital expenditure is translating into stronger growth and returns. Alphabet set the tone last week when strong results were overshadowed by another increase in its spending guidance.
Away from technology, earnings remain constructive. Coca-Cola climbed after raising its annual forecasts, while several companies outside the semiconductor space also received a positive response to their results. Earnings themselves are not the main problem. The concern remains whether current valuations can be justified while AI-related spending continues to accelerate.
Semiconductors have now fallen for four successive sessions and remain under pressure. The Philadelphia Semiconductor Index is trading roughly 24% below its late-June peak, while the Nasdaq 100 remains around 10% below its record high.
The latest pressure came after reports that China had begun producing its own immersion deep-ultraviolet lithography machines. The development sent ASML sharply lower and added to weakness across semiconductor and memory stocks in Asia. China’s technology is not yet considered a direct replacement for ASML’s equipment, but the announcement has raised questions about future competition and the durability of one of the strongest areas of the AI trade.
At the same time, the equal-weighted S&P 500 reached a record high on Tuesday as capital continued rotating away from semiconductors and into other areas of the market. Healthcare and Financials have been among the clearest beneficiaries, with stronger price action suggesting investors are broadening exposure beyond the technology names that led much of the previous advance.
This is an important distinction. Weakness in one heavily weighted part of the market is not yet translating into broad market weakness. Instead, capital is being redistributed into sectors displaying stronger relative strength, which is helping to keep the wider trend intact.
We therefore maintain a cautious but selective stance as the market dynamic changes. Our focus remains on the strongest stocks in the strongest sectors, particularly those continuing to display clean and durable trends. A degree of portfolio rebalancing may also be required, with positions breaking below major support levels exited and capital redirected towards areas showing greater strength.
We will continue monitoring the semiconductor correction closely. Strong earnings from Microsoft, Meta and other major technology companies could restore confidence in the AI trade, while further weakness may eventually create higher-probability entry points. For now, however, the Fed decision and the market’s response to tonight’s earnings will provide the clearest indication of whether this rotation continues or develops into broader weakness.
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