U.S. equities were mixed in midday trading on Thursday, with the S&P 500 dipping 0.1%, the Nasdaq edging up 0.1%, and the Dow down 0.6%. The divergence was driven by a sharp sell-off in software stocks, which offset gains in semiconductor shares.
An initial estimate shows that four AI-related companies—Western Digital, Sandisk, AppLovin, and Datadog—collectively lost nearly $68 billion in market value. The average decline was 12.1%, with AppLovin dropping 19.7% and Datadog falling 15.9%.
Semiconductor stocks, as tracked by the SOXX ETF, rose 1.55%, while the software-sector fund IGV fell 1.88%. This split underscores a key shift: robust AI demand is no longer enough to satisfy investors, who are now focusing on earnings quality and guidance.
Earnings season highlights
With over 75% of S&P 500 companies reporting, adjusted earnings have grown 31.1% year-over-year, the fastest pace since 2021. Technology sector earnings are projected to rise 72%. The index trades at 20.4 times forward earnings, a premium that leaves little room for disappointment.
Western Digital and Sandisk both guided revenue above analyst estimates, yet their shares fell 9.4% and 3.4%, respectively. Both stocks had surged roughly 200% and 400% year-to-date, reflecting extreme expectations. “There are just incredible expectations,” noted Hank Smith of Haverford Trust.
Software stocks face unique challenges
AppLovin reported quarterly revenue that missed forecasts, while Datadog projected slower third-quarter growth. HubSpot also declined 20.9% after multiple brokerages downgraded the stock. Analyst actions were consistent: Wells Fargo cut AppLovin to Equal Weight, Piper Sandler lowered it to Neutral, and Stifel reduced HubSpot to Hold.
The new price targets imply limited upside—roughly 6% to 15% for AppLovin and 1% to 11% for HubSpot—suggesting that the recent sell-off may not be overdone.
Broader AI resilience
Despite the software weakness, the broader AI complex showed resilience. Microsoft rose 1.77%, Amazon gained 0.36%, and Nvidia slipped just 0.65%. The semiconductor fund advanced 1.55%, indicating that hardware demand remains strong.
Economic data had little market impact. Initial jobless claims came in at 199,000, below the expected 202,000. Second-quarter productivity rose 1.4%, and unit labor costs climbed 1.3%. FWDBONDS’ Christopher Rupkey noted that a true productivity miracle would require AI to reduce production costs, but the data gives the Fed more room to monitor inflation.
Oil and rates add pressure
Oil prices continued to climb, with Brent crude up 2.2% to above $81, as traders monitored Iran talks. Treasury yields rose, with two- and five-year yields up over five basis points. This could pressure high-valuation stocks, especially if Friday’s jobs report comes in strong.
Industrial stocks were mixed. Honeywell Aerospace dropped 20.4% after cutting its annual sales guidance, while Parker-Hannifin rose 6.6% on a higher profit forecast. SpaceX gained 2.5% as its post-IPO lockup ended.
Despite the sell-off, market breadth was positive, with gainers slightly outnumbering losers. The S&P 500 recorded 29 new 52-week highs versus three new lows. Investors now look ahead to Friday’s July jobs report, which could influence rate expectations and further shape the AI trade.
