Nasdaq, S&P 500 Futures Plunge After Trump's Comments And ASML's Weak Forecast Deepens Tech Sell-Off: AI Narrative May Be Priced In, Says Analyst

Sentiment will likely reverse course, with the index futures trading notably lower early Wednesday. The recent run-up ideally should render the mood cautious, and the caution may intensify as the first AI-levered chip company from across the Atlantic reported second-quarter results that were not viewed positively by the Street.

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Republican presidential nominee Donald Trump added to the worries concerning the tech space after he said in a Bloomberg interview that Taiwan should foot its own defense bill as it strives to keep China at bay. Taiwan houses most chip suppliers to the tech industry. Bond yields edged up ahead of the housing starts and industrial production report.

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Cues From Last Session:

U.S. stocks kept their rally streak alive as they advanced on Tuesday, with material, industrial and consumer discretionary stocks fueling the upside, offsetting the weakness seen among IT and communication services stocks. A healthy retail sales report did not dampen expectations for a rate cut, with bond yields finishing down 1.70%.

The major averages opened uniformly higher, and the Dow Jones Industrial Average and the S&P 500 Index advanced steadily and kept themselves to the positive terrain.

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In the process, the Dow and the S&P 500 Index notched up fresh intraday and closing highs. Commenting on the Dow's move, Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, said, "The Dow has spent most of the past two years lagging the S&P 500 index, but it has new wind in its sales this summer on the hopes that the market rally will broaden from a narrow set of technology companies into a broader array of companies throughout the economy."

The Nasdaq Composite, however, squandered its early gain and traded mostly below the unchanged line before closing modestly higher.

Small-caps once again outperformed with the Russell 2,000 Index closing at a fresh 2-1/2 year high.

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Insights From Analysts:

Money is flowing out of mega-cap tech stocks and the market breadth is rapidly improving as the odds for a Fed rate cut in September climbed to over a 90% probability, said fund manager Louis Navellier.

"This is a healthy development but will be tested as earnings and forecasts roll out during the current earnings period," he said. "No one is calling the AI narrative a bubble (yet) but it may be largely priced in until more concrete examples of inroads are identified beyond chip sales and data center build-outs."

The momentum remains clearly positive, and the earnings season is off to a good start, Navellier said.

LPL Financial Chief Technical Strategist Adam Turnquist said competing factors underpin small-cap performance. Immediate data points such as consumer price inflation and Fed projections are igniting small-cap names higher for now, the strategist said. He expressed doubts about whether a longer-term economic slowdown will balance out the recent step higher.

Turnquist sees a portion of small-cap stocks, mainly regional banks on the value side, to continue to benefit from elevated lending rates if the higher-for-longer policy takes hold. On the contrary, if economic weakness persists, he recommended positioning in more profitable segments of the small caps and remaining cautious. "The late-cycle characteristics of this economy and the increase in expected volatility require a watchful and targeted approach at this point," he added.

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