Key Takeaways:
A sharp rotation out of growth and emerging-market stocks into commodities and real estate drove the widest asset-class divergence in months on Tuesday.
The S&P 500 slipped 0.19% while the Dow industrials hit a fresh all-time high, as a 5% surge in crude oil triggered a broad rotation out of technology stocks and emerging markets.
"The combination of Strait of Hormuz disruptions and disappointing semiconductor earnings is forcing a repricing of risk across asset classes," said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
The iShares Emerging Markets ETF tumbled 2.74%, while the Nasdaq 100 ETF slid 1.85% as chipmakers extended their selloff for a second session. The iShares Semiconductor ETF fell more than 2%, with Applied Materials dropping more than 8% and Advanced Micro Devices losing more than 6% after Samsung Electronics' preliminary earnings failed to meet elevated expectations. The US Brent Oil Fund surged 4.98%, tracking WTI crude's more than 1% gain after attacks on shipping near the Strait of Hormuz. The US Real Estate ETF rose 1.19%, the only major sector ETF in positive territory alongside energy.
The divergence signals a defensive repositioning as investors weigh the dual threat of geopolitical supply shocks and stretched valuations in AI-linked stocks. The 10-year Treasury yield climbed to a two-week high of 4.51%, while the US trade deficit widened to a 14-month high of $77.6 billion, a negative factor for second-quarter GDP. Markets are pricing a 26% chance of a rate hike at the Federal Reserve's July 28-29 meeting.
The 4.98% jump in the US Brent Oil Fund marked the largest single-day gain among major asset-class ETFs, as geopolitical risk in the Persian Gulf escalated. Axios reported that a Qatari LNG carrier was hit by a projectile and a laden Saudi oil tanker suffered damage near the Omani coast while transiting the Strait of Hormuz. Iran fired at least two missiles at commercial ships in the strait, according to the report, sending WTI crude above $70 a barrel.
The rally in energy stocks stood in stark contrast to the selloff in growth-sensitive assets. Agricultural funds and the US Dollar Index posted modest gains of up to 0.40%, while gold ETFs fell as much as 1.41% as the dollar strengthened and real yields rose.
The selloff in chipmakers dragged the broader technology sector lower, though software stocks provided a partial offset. Thomson Reuters gained more than 5% to lead the Nasdaq 100, while Workday rose more than 3% and Microsoft added more than 1%. The rotation out of AI infrastructure names into software reflects growing skepticism about whether hundreds of billions of dollars in AI capital spending can be sustained at current valuation levels, traders said.
New York Fed President John Williams added to the pressure, saying inflation remains "quite high" and that he sees steady economic growth and labor market stability — comments interpreted as slightly hawkish and reducing the odds of near-term rate cuts.
The divergence between the Dow's record high and the Nasdaq's decline underscores the narrowness of this market's leadership. With the Russell 2000 ETF also falling 0.91%, small-cap stocks failed to provide the breadth that typically signals a healthy rally. Investors now face a critical week ahead, with the June nonfarm payrolls report and ISM Manufacturing PMI due later this week, followed by the start of second-quarter earnings season.
This article is for informational purposes only and does not constitute investment advice.
