Wall Street's recent rally hit a pause on Thursday as a broad decline in semiconductor stocks dragged the S&P 500 lower by 0.38% to close at 7,337.11. The tech-heavy Nasdaq slipped 0.13% to 25,806.20, while the Dow Jones Industrial Average fell 0.63% to 49,596.97. Among the S&P 500's 11 sectors, only two managed to stay in positive territory, underscoring the breadth of the sell-off.
Chip Stocks Reverse AI-Fueled Gains
The decline in chip stocks was particularly notable, as it reversed gains from the previous session when upbeat guidance from Advanced Micro Devices (AMD) had propelled the S&P 500 and Nasdaq to fresh records. The PHLX Semiconductor Index slid 2.7%, with Intel Corporation (INTC) and AMD both dropping roughly 3%. Despite the pullback, Mike Dickson, head of portfolio management at Horizon Investments, noted that the decline did not erase what he called "a rip-roaring quarter of recovery" for the sector.
Shares of Arm Holdings (ARM) also traded lower in the U.S. after the UK-based chip designer flagged weaker demand in the smartphone market and indicated limits on its ability to deliver its new AI chip. CEO Rene Haas told investors that Arm can cover the first $1 billion in demand, but supply beyond that remains uncommitted, adding to concerns about the sustainability of AI-driven growth.
AI Giants Hold Steady
Despite the chip weakness, some of the largest AI-related stocks continued to attract investor interest. Nvidia (NVDA) and Microsoft (MSFT) both gained nearly 2%, suggesting that investors are not yet abandoning the AI theme. However, market breadth narrowed, with decliners outpacing advancers by a ratio of 1.8 to 1 on the S&P 500. Materials and energy sectors were among the hardest hit.
Economic Data and Fed Comments Weigh
The economic backdrop provided little incentive for investors to bet on a swift shift in Federal Reserve policy. Initial jobless claims rose by 10,000 to 200,000 for the week ended May 2, falling short of the 205,000 economists had expected, according to a Reuters survey. Despite the increase, ongoing claims dropped to their lowest level since January 2024, indicating a still-tight labor market. "Steady as a rock," said FWDBONDS chief economist Christopher Rupkey, describing the labor market conditions.
Adding to the cautious tone, Cleveland Fed President Beth Hammack signaled that interest rates are likely to remain "on hold for quite some time" as policymakers contend with persistent inflation and ongoing uncertainty. Hammack also warned that an "inflationary mindset" could be taking hold among businesses and consumers after several years of price shocks, a risk that could keep the Fed from easing policy anytime soon.
Tariff Ruling Adds Uncertainty
After the market close, the U.S. Trade Court struck down President Donald Trump's latest 10% global tariffs, ruling that the sweeping duties were not supported by a 1970s trade statute. While the decision came too late to impact regular trading, it introduces a new variable for investors already monitoring trade policy, interest rates, and geopolitical headlines.
Tech Bright Spot: Datadog
Amid the chip slump, some tech names managed to shine. Datadog (DDOG) surged after the cloud-monitoring firm raised its full-year revenue guidance to between $4.30 billion and $4.34 billion, up from its previous forecast of $4.06 billion to $4.10 billion. CEO Olivier Pomel attributed the upgrade to the company's role in helping customers deploy "AI-enabled solutions," highlighting the continued demand for AI-related infrastructure.
Market Outlook
The S&P 500 still holds a 7% gain for 2026 so far, but Thursday's session highlighted how dependent the rally has been on AI-related names. A potential slowdown in chip stocks could spark a broader reckoning on valuations, especially as oil prices, inflation, and ongoing U.S.-Iran negotiations keep investors on edge. All eyes now turn to Friday's U.S. nonfarm payrolls report, which is expected to show an April jobs gain of 62,000, a sharp drop from March's 178,000 rebound. A stronger-than-expected reading could keep the Fed firmly in wait-and-see mode, while a softer number might reignite debate about whether Thursday's decline was merely profit-taking or a sign of rougher days ahead.
