NASDAQ Slumps as AI Trade Reprices in July

The NASDAQ index declined over 3% in July, driven by a slump in semiconductors that marked the sector's worst monthly performance since 2008. While the Dow Jones Industrial Average maintained a four-month winning streak, the S&P 500 ended the month slightly in the red, dropping 0.1%. This period saw a massive repricing of the artificial intelligence trade, highlighted by a 13% drop in the iShares MSCI USA Momentum Factor ETF, its worst performance since April 2022.

Market instability was compounded by credit market stress related to AI-debt issuance from Nvidia Corporation and Oracle Corporation, as well as leverage-driven failures including a crash of the Korea Kospi. Broad macroeconomic pressures included tensions between the United States and Iran and investor concerns that the Federal Reserve System was lagging in its response to inflation.

Analysts from UBS described the collapse of high-momentum stocks as a healthy correction in a young AI spending cycle and an anomaly with no real precedent since the 1990s. This divergence suggested a broadening of investor interest, evidenced by rallies in Caterpillar and Palantir. Adam Parker of Trivariate Research advised investors to prioritize fundamental bottom-up stock picking and diversification to navigate the volatility, though he maintained that semiconductors should outperform GDP over a 12-month horizon.