Chip Stocks Plunge, Putting Wall Street on Defense

(Friday market close) A summer storm struck Wall Street Friday after months of clear skies, sending the high-flying tech sector dramatically lower, especially chip stocks. The PHLX Semiconductor Index (SOX)—which had nearly doubled since late March—fell back to earth with a 10% thud.

The selloff had origins in disappointing Broadcom (AVGO) guidance earlier this week and rising Treasury yields after the monthly jobs report fueled rate hike fears. Friday's move appeared initially to be a leadership reset, not a broad liquidation of the rally in major indexes.

The SOX fell far more sharply than the S&P 500^® Index (SPX), which sank 200.57 points (-2.64%) to 7,383.74, or even the tech-heavy Nasdaq Composite^® ($COMP), down 1,121.53 points (-4.18%) to 25,709.43. The Dow Jones Industrial Average^® ($DJI) fell 695.15 points (-1.35%) to 50,866.78.

The Nasdaq was down more than 4.6% for the week by late Friday, the worst week it's had in more than a year. The S&P 500's drop this week was almost 2.6%, breaking a nine-week win streak.

In what might be a sign that selling wasn't panicked, market breadth remained relatively orderly on Friday with 54% of S&P 500 shares trading above their 50-day moving average by late in the session. That was slightly down from earlier this week but still slightly up for the month to date. It didn't show signs of falling out of bed, which would happen if selling were widespread across sectors.

On the other hand, the Cboe Volatility Index (VIX) rose 28% Friday and kept rising after the session ended, suggesting rockiness may not be over. Typically, such sessions are like ringing a big bell, with reverberations continuing for a while. This often means choppy trading ahead.

Digging deeper into causes, Broadcom didn't raise its full-year AI chip target, which helped sap enthusiasm from the chip group, and institutional investors appeared more cautious later this week. Moves in other markets support a narrative that tilts toward risk aversion. Bitcoin (/BTC) fell below $60,000 Friday for the first time since October 2024. Over the past week, bitcoin investors have endured realized losses of about $1.2 billion a day, according to Glassnode data.

Growth sectors, including tech, are sensitive to interest rates, and a sudden six-basis point jump in the 10-year Treasury yield to 4.54% after Friday's May nonfarm payrolls report set off selling quite early in the session. Shorter-term yields more sensitive to Fed rate policy rose more dramatically, including a nearly 12 basis-points leap in the 2-year note yield to 4.16% by late in the day. That's the highest since early 2025.

The yield move reflected May's nonfarm payrolls report released before the open. Jobs growth last month reached 172,000 almost double the average estimate, and the Bureau of Labor Statistics (BLS) upwardly revised growth the two prior months by 93,000.

"This was a massive upside surprise," said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research (SCFR). "The headline number was good, but the revisions were also positive."

Solid jobs growth can raise consumer demand and push up wages, both of which play into worries about inflation and could lead to the need for Fed rate hikes.

The unemployment rate stayed at 4.3%, and hourly earnings rose 0.3% month over month. 
The immediate read-through was a reduced probability of near-term Fed cuts.

Economic resilience—seen not just in the jobs report but in lesser employment updates earlier this week and decent retail sales and manufacturing data—suggests heavy inflation hasn't yet had a major impact on economic growth.

This suggests if the Fed wants to focus on taming inflation—perhaps with a rate hike later this year—it may be able to do so without hurting consumers or sapping the job market. Inflation rose sharply the last two months as oil prices scurried higher on lack of resolution to war in Iran. This week appeared to bring little if any progress in negotiations, another bearish overhang.

By late Friday, futures still priced in no chance of a rate hike at the Fed's June 16-17 meeting, but odds of at least one hike this year rose to more than 70%, according to the CME FedWatch Tool. That's up from 50% on Thursday before the jobs report. Investors are even starting to price in decent odds of two more hikes in 2026, with odds of that now above 25%.

All this may feel like background on a day when the chip sector fell 10%, but it's part and parcel. Much of the tech rally the last two months rested on massive first-quarter earnings gains for the chip sector reflecting heavy spending by data center companies building AI infrastructure. Higher borrowing costs associated with possible rate hikes would potentially lead to less spending, especially as many big companies increasingly look to borrowing to fund their AI spending.

S&P 500 earnings growth this year is expected to be 22.8%, FactSet said Friday. That includes 44.1% growth in the info tech sector, which includes the major chip stocks. The doubling of the SOX index since late March bakes in that sort of sizzling earnings growth.

If demand is truly flattening (something far from proven) and rates are rising, investors and analysts would potentially rethink those heavy earnings growth estimates. In such a case, current stock prices would likely be tougher to justify. This helps explain Friday's caution.

That said, one day is only a snapshot, and the selling likely had technical origins, too. The SOX index saw its Relative Strength Index (RSI) reach 80 earlier this week, well above the traditional "overbought" metric of 70. The SOX also was priced 35% above its 50-day moving average by Wednesday, a massive and rapid change from late March when it traded below the 50-day moving average.

This sort of premium is often hard for an index to maintain, and the Broadcom earnings report—which ironically showed parabolic growth in the company's business and solid guidance unchanged from the previous quarter—appeared to help pop the technical balloon slightly. More selling followed as investors weighed the chance of rising rates and saw risk appetite diminish in bitcoin late this week.

Even with Friday's retreat, the SOX closed the session near levels last seen on May 26, less than two weeks ago. It had risen about 15% from Memorial Day to its high Wednesday.

At root, Broadcom's earnings could be called a success, but they failed to ignite enthusiasm among investors primed to see an ever-rising amount of AI demand. In that sense, Broadcom's unchanged guidance appeared to disappoint, and to raise concerns that demand may be topping out.

Those are only concerns for now, with no proof. The pudding gets served starting late next month when second quarter earnings start to arrive, but that's a long way off and the market lacks much in the way of corporate catalysts between now and then.

Which brings up seasonal factors. June is historically a weak market for equities, though recent years haven't swung that way. This June arrives with the backdrop of the fierce April and May rally, lending more concern that a summer pullback might occur.

Technically, now that the 7,500 area—a key pivot point in the S&P 500 Index—has been breached, the 7,330 low from mid-May represents a possible support level. An S&P 500 range that stays between 7,330 and 7,600 can still be read constructively if breadth doesn't deteriorate sharply and dispersion starts to ease.

The Cboe S&P 500 Dispersion Index (DSPX), which measures the expected dispersion in the S&P 500 Index over the next 30 days, recently fell to 40.2 but remains historically high. A high DSPX means individual stocks are expected to move more independently and a low DSPX means they're expected to move closely together.

However, the closing bell didn't provide any signals of technical bullish hope for Monday. Major indexes dropped to near their lows for the day in the last minutes of Friday's session, perhaps indicating selling isn't finished. Investors will likely want to keep an eye on overnight futures trading when it begins Sunday.

Perhaps ironically, crude oil prices fell almost 3% Friday to just above $90 per barrel. Though this doesn't necessarily hint at any progress reopening the Strait of Hormuz, it's near recent lows that cheered investors a week ago. That said, the equity market's spring rally took place with the backdrop of four-year highs in crude prices that have U.S. gasoline prices above $4.50 a gallon, so the correlation between stocks and oil doesn't seem as relevant as it may have once been.

Bitcoin flows reverse: Investors sold a net $2.4 billion from bitcoin spot exchange-traded products (ETP) during May, the largest monthly net outflow since November 2025 and the third largest since spot ETPs launched in early 2024, according to Glassnode data. May marked a reversal after two months of net inflows.

2026 Fixed Income Mid-Year Outlook: Income still matters for bond investors in the second half of the year, but investors should be selective. Schwab sees opportunities in investment grade corporate bonds, high-yield bonds, and preferred securities, though each comes with risks, wrote Collin Martin, head of fixed income research and strategy at SCFR, in the latest Schwab analysis of the fixed income market.