In the early hours of July 3 Beijing time, the US stock market experienced a highly dramatic trading session.
The Dow Jones Industrial Average surged 594.83 points to close at 52,900.07, up 1.14%. Not only did it break the all-time closing high set on June 30, but it also hit a new intraday record of 52,903.85. In stark contrast, the tech-heavy Nasdaq Composite fell 207.36 points to 25,832.67, down 0.80%. The S&P 500 remained nearly flat, edging up just 0.01 points to 7,483.24.
The three major indices moved in sharply different directions, with the divergence between the Dow and Nasdaq reaching levels rarely seen in recent months. How did such an extreme "split" occur in the same market, under the same set of macroeconomic data?
On the surface, this looks like another case of sector rotation. But a deeper analysis suggests it may be the market’s first systemic reassessment of the AI computing power investment boom of the past 18 months. This wave of reflection is now spreading from traditional US equities into the crypto asset space.
Data-Driven: How a "Surprise" Jobs Report Is Rewriting the Rate Hike Playbook
The divergence began with a jobs report that came in far below expectations.
US nonfarm payrolls for June showed just 57,000 new jobs added last month—less than half of the 115,000 forecast by economists surveyed by Dow Jones. However, the unemployment rate unexpectedly fell to 4.2%, beating the expected 4.3%. Slowing job growth alongside a declining unemployment rate sends a mixed signal.
Yet, the market’s reaction was fairly unified. After the data release, the yield on the rate-sensitive 2-year US Treasury fell about 5 basis points to 4.13%. The US Dollar Index dropped more than 0.7% intraday, marking its largest single-day decline in two months. According to the CME FedWatch Tool, traders’ expectations for the Fed to keep rates unchanged at the July meeting rose from about 70% before the data to 82.4%, while the probability of a rate hike fell to 17.6%. Bets on further Fed rate hikes for the year contracted sharply, with the expected timing of the next hike pushed from October to December.
Lower rates theoretically benefit high-valuation growth stocks, as a lower discount rate increases the present value of future cash flows. But Thursday’s market reaction was the opposite: capital flowed out of high-valuation growth sectors like AI and semiconductors, and into traditional blue chips and defensive assets.
This suggests that the main driver of the day’s action wasn’t rate expectations, but rather deepening doubts about the sustainability of AI sector valuations and earnings.
Chip Stocks Drop Nearly 11% in Two Days: Cracks in the AI Narrative
The Philadelphia Semiconductor Index stood out as the most striking indicator of this divergence. On Thursday, the index plunged 5.44% to close at 12,626.22. The day before, it had already tumbled 6.27%. The two-day drop approached 11%—an exceptionally rapid decline even by semiconductor industry standards.
At the individual stock level, the sell-off swept across the entire chip supply chain. Memory maker Sandisk plummeted over 14%, down about 27% from its recent high. Semiconductor equipment stocks fared even worse, with Teradyne down roughly 13.6% and KLA falling about 11.5%. Micron dropped 5.49%, Intel slid 5.25%, and AMD lost 4.26%. Even Nvidia, previously seen as the "hard currency" of AI computing, wasn’t spared, closing down 1.39% at $194.83.
Goldman Sachs’ "AI Winners vs. Losers" pair trade basket fell 16% over two days, its worst performance since records began.
There were multiple triggers for the sell-off. On one hand, rumors circulated that AI company Anthropic plans to develop its own AI chips, raising concerns about future chip demand. On the other, reports surfaced that Meta CEO Mark Zuckerberg told staff that AI agent development over the past four months had lagged expectations. More critically, Meta was said to be planning to sell idle AI computing power—a move interpreted by the market as a sign of potential overcapacity in AI infrastructure.
Anshul Sharma, CIO at Savvy Wealth, commented: "This could be a rotation out of sectors that have been hot in recent months into other areas, but I do think the market is repricing AI trades themselves. If companies become more sensitive to computing costs, will that be their next area of focus?"
This statement reveals a deeper logic: for the past 18 months, the market assumed AI computing demand would expand indefinitely, and chip stock valuations surged far ahead of actual earnings. Once the "infinite demand" assumption is challenged, downward pressure on valuations is released rapidly.
Capital Shifts: A Migration from AI Computing to Traditional Blue Chips
Where did the money go after leaving tech? Thursday’s trading gave a clear answer.
Traditional defensive sectors rallied across the board. McDonald’s jumped over 4%. Coca-Cola and Johnson & Johnson rose more than 3%. Walmart and Procter & Gamble were up 2%. Healthcare names also gained, with AbbVie up nearly 4% and Merck climbing 3.34%. Defense and aerospace stocks surged as well, with Lockheed Martin up 4%.
Even within large-cap tech, there was significant divergence. Apple soared 4.84% to $308.63, becoming the single largest contributor to S&P 500 market cap gains for the day. Microsoft rose 1.62%, and Amazon edged up 0.40%. But Tesla fell 7.49%, and Meta (Facebook) dropped nearly 5%. Apple’s rally had its own catalyst—rumors of a major chip order from a large customer—but the broader trend was clear: even within tech, capital concentrated in companies with more stable cash flows and relatively reasonable valuations.
The Russell 2000 small-cap index fell 0.5% to 2,996.11, indicating that funds did not broadly shift into small and mid-cap stocks, but instead focused on a handful of large, cash-rich, defensive blue chips.
The logic of sector rotation can be summarized as: weak nonfarm data → cooling rate hike expectations → theoretically bullish for growth stocks → but AI sector valuations already at extremes → rising uncertainty about AI demand → profit-taking in overvalued tech → rotation into reasonably valued, stable-cash-flow blue chips → Dow hits new highs while Nasdaq comes under pressure.
This is not a simple "lower rate hike expectations benefit growth stocks" narrative, but a repricing of "which assets are truly worth holding."
Independence Day Holiday and Market Rhythm
It’s important to note that, because US Independence Day (July 4, 2026) falls on a Saturday, US financial markets observed the holiday on Friday, July 3, with a full-day closure. CME precious metals, US crude oil, forex, and equity index futures contracts all closed early at 17:00 UTC (01:00 Beijing time on July 4).
This means Thursday was the last full trading session before the holiday. Holiday effects typically bring lower trading volumes and heightened volatility, as some investors adjust positions ahead of a long weekend. This may have amplified the day’s market divergence. Total trading volume on US exchanges Thursday reached 19.92 billion shares.
Conclusion: Divergence Ends with Repricing
The Dow’s all-time high at 52,900 and the Nasdaq’s 0.8% drop on the same day are not a case of "mispricing," but a signal that the market is actively repricing different asset classes.
The "surprise" nonfarm payrolls figure was only the trigger. The real driver is the market’s reassessment of the return cycle for AI computing investments. Over the past 18 months, semiconductor valuations were built on the narrative of "infinite AI demand." As faith in that narrative starts to wane, valuation compression becomes inevitable. The rotation from AI semiconductors to traditional blue chips is essentially a reevaluation of risk—not a rejection of AI’s future, but an acknowledgment that market pricing may have gotten ahead of fundamentals.
For the crypto market, this divergence also holds valuable lessons. Improved liquidity expectations from the jobs data provided a short-term boost for Bitcoin and Ethereum, but continued institutional outflows suggest that the macro narrative shift has yet to translate into meaningful new inflows. A true risk appetite recovery in crypto assets will require more confirmation from underlying fundamentals.
After the Independence Day holiday, the market will open a new data window. The end of this divergence isn’t about one side "winning," but about the market as a whole searching for a new anchor that brings all asset classes into equilibrium.
FAQ
Q1: Is it rare for the Dow to hit a record high while the Nasdaq falls?
A significant single-day divergence between the Dow and Nasdaq is unusual, but not unprecedented. This time, the main driver was a large-scale rotation of funds out of high-valuation AI semiconductor stocks and into traditional blue chips, coupled with a sharp drop in June nonfarm payrolls that slashed rate hike expectations. The Philadelphia Semiconductor Index’s nearly 11% two-day drop was the main drag on the Nasdaq.
Q2: What were the specifics of the June US jobs report, and how did it impact Fed policy?
US nonfarm payrolls for June added just 57,000 jobs, well below the expected 115,000. Following the release, the market-implied probability of a Fed rate hike in July fell from about 33% to 20%. However, the unemployment rate dropped to 4.2%, indicating continued labor market resilience. According to CICC research, the data gives the Fed more time to wait and see.
Q3: Why did chip stocks plunge for two consecutive days?
The sell-off was triggered by Anthropic’s announcement of plans to develop its own AI chips, concerns about the sustainability of AI computing demand, and worries about overcapacity after reports that Meta may sell idle computing power. The deeper reason is that AI semiconductor valuations had reached extreme levels, and the market began to question whether earnings could support current prices.
Q4: Where did capital flow after leaving tech stocks?
Funds mainly rotated into traditional defensive sectors and cash-rich blue chips, including consumer staples like McDonald’s, Coca-Cola, and Johnson & Johnson, as well as healthcare and defense stocks. Apple bucked the trend with a 4.84% surge on procurement rumors, making it one of the few large tech names favored by investors that day.
Q5: How does the US stock market holiday for Independence Day affect trading?
Because Independence Day (July 4, 2026) falls on a Saturday, US financial markets observed the holiday on Friday, July 3, with a full-day closure. Some CME and ICE futures contracts also closed early. The trading session before the holiday typically sees reduced volume, which can amplify market volatility.
