Wall Street closed a turbulent week with the Nasdaq Composite falling 2.9%, while small-cap stocks showed relative strength. The S&P 500 dropped 1.55%, and the Dow Jones Industrial Average slipped 0.93%. The Russell 2000 edged down just 0.5%, maintaining a 19.4% gain for 2026, nearly double the Nasdaq's 9.8% rise.
The divergence between large-cap tech and small caps was the week's defining theme. The 2.4-point spread between the Nasdaq and Russell weekly declines highlighted a rotation away from high-flying semiconductor names. The PHLX chip index ended 20.2% below its record high from June 22, despite still being up nearly 65% year-to-date. Ryan Detrick, chief market strategist at Carson Group, described the selloff as "chip fatigue."
Friday's trading extended the selling beyond semiconductors. On the NYSE, decliners outpaced advancers by a ratio of 1.94-to-1, while on the Nasdaq the ratio was 1.76-to-1. Energy was the only S&P 500 sector to post gains for the day, as oil prices surged. U.S. crude jumped 4.48% to $82.49 per barrel, and Brent rose 4.59% to $88.10, driven by renewed tensions between the U.S. and Iran that stoked inflation fears. Despite the oil spike, the 10-year Treasury yield slipped to 4.554%.
Inflation data offered some relief earlier in the week. Consumer prices in June fell 0.4% month-over-month, bringing the annual rate to 3.5%. Producer prices also declined 0.3% in June. However, the market remains wary of input cost pressures from energy and AI infrastructure spending.
Earnings season is gaining momentum. As of Friday, 49 S&P 500 companies had reported results, with 90% surpassing expectations. LSEG reported aggregate earnings growth estimates climbing to 26.0%, up from 19.2% on April 1, a significant upward revision. However, weak guidance triggered steep selloffs in some names. Netflix (NASDAQ:NFLX) fell 7.3% after issuing a cautious earnings projection, and Intuitive Surgical (NASDAQ:ISRG) tumbled 14.2% after maintaining its procedure-growth forecast and citing insurance processing delays.
Next week promises to be pivotal, with over 80 S&P 500 companies reporting. Alphabet (NASDAQ:GOOGL) and Texas Instruments (NASDAQ:TXN) are scheduled for Wednesday, followed by Intel (NASDAQ:INTC) after the close on Thursday. Tesla (NASDAQ:TSLA) also reports during the week. Alphabet's capital spending plans could have broad implications, according to Kevin Mahn, chief investment officer at Hennion & Walsh, who warned that any reduction might result in "ripple effects across the entire AI ecosystem."
Expectations for semiconductor firms remain elevated. Intel shares have surged over 160% this year, while Texas Instruments has gained 60%. Their guidance will test whether AI enthusiasm is fully priced into current valuations. The chip sector's recent weakness suggests that any disappointment could prolong the downturn, while positive forecasts might trigger a rebound.
Interest rate risk continues to loom. Futures indicate roughly a 15% probability of a Federal Reserve rate increase in July, with the chance climbing to nearly 65% by September. Some policymakers have pointed to energy and AI infrastructure costs as potential sources of inflation pressure. Additional escalation in the Middle East could push inflation expectations and bond yields higher.
The most definitive signal in this week's market action is the relative performance of small caps versus large-cap tech. While chip leaders adjust, small-cap stocks are holding their ground. Next week's earnings guidance will be crucial in determining whether this rotation persists, as investors weigh the impact of AI spending, energy costs, and monetary policy on different segments of the market.
