Dow Jones hits record high, NASDAQ falls: extreme divergence between the retreat of AI computing power and the rise of traditional blue chips

In the early hours of July 3, Beijing time, the U.S. stock market experienced a highly dramatic trading session.

The Dow Jones Industrial Average surged 594.83 points, closing at 52,900.07 points, a gain of 1.14%, not only breaking the all-time closing high set on June 30 but also touching a historic intraday high of 52,903.85 points. However, the tech-heavy Nasdaq Composite Index fell 207.36 points to close at 25,832.67 points, a decline of 0.80%. The S&P 500 Index was nearly flat, edging up 0.01 points to 7,483.24 points.

The three major indexes followed distinctly different trajectories, with the divergence between the Dow and the Nasdaq reaching a rare level in recent times. In the same market, with the same set of macroeconomic data, why did such extreme "fire and ice" occur?

On the surface, this is another case of sector rotation; on deeper analysis, it may be the market's first systemic reflection on the wave of AI computing investment over the past year and a half. The ripple effects of this reflection are now spreading from traditional U.S. stock markets to the crypto asset space.

Data-Driven: How a "Shock" Nonfarm Payrolls Report Rewrote the Rate Hike Script

The starting point of this divergence was a jobs report that fell well short of expectations.

The U.S. June nonfarm payrolls data showed only 57k new jobs added last month, less than half of the 115k expected by economists surveyed by the Dow Jones. However, the unemployment rate unexpectedly fell to 4.2%, lower than the 4.3% economists had forecast. Employment growth slowed significantly while the unemployment rate also declined—this combination itself sent a contradictory signal.

Nevertheless, the market's interpretation was remarkably consistent. After the data release, the 2-year U.S. Treasury yield, most sensitive to monetary policy, fell about 5 basis points to 4.13%; the dollar index dropped over 0.7% intraday, its biggest single-day decline in two months. The CME FedWatch Tool showed traders' probability of the Fed keeping rates unchanged at the July meeting rose from about 70% before the data release to 82.4%, while the probability of a rate hike fell to 17.6%. The market's bets on the Fed raising rates this year notably contracted, with the expected timing of a hike pushed back from October to December.

In theory, lower interest rates are favorable for high-valuation growth stocks—a lower discount rate increases the present value of future cash flows. But the market's actual reaction on Thursday was the opposite: funds aggressively fled AI and semiconductor high-valuation growth sectors and poured into traditional blue chips and defensive assets.

This indicates that the core variable driving the day's action was not the interest rate expectation itself, but the market's deep-seated doubts about the valuation and earnings sustainability of the AI sector.

Chip Stocks Fell Nearly 11% in Two Days: Cracks in the AI Narrative

The Philadelphia Semiconductor Index was the most glaring indicator of this divergence. The index plunged 5.44% on Thursday alone, closing at 12,626.22 points. And in the previous trading session, it had already tumbled 6.27%. The cumulative decline over two trading days was nearly 11%, a pace rarely seen in the entire history of the semiconductor industry.

At the individual stock level, the sell-off covered almost the entire chip supply chain. Memory manufacturer Sandisk plunged over 14%, down about 27% from its recent high; semiconductor equipment stocks fell even more, with Teradyne plummeting about 13.6%, KLA down about 11.5%; Micron Technology fell 5.49%, Intel fell 5.25%, and Advanced Micro Devices fell 4.26%. Even Nvidia, previously seen as "hard currency" for AI computing, did not escape, closing down 1.39% at $194.83.

Goldman Sachs' tracked pair trade of "AI beneficiaries vs. AI losers" fell 16% over two days, the worst performance since the indicator's inception.

There was more than one trigger for the sell-off. On one hand, market rumors that AI company Anthropic plans to develop its own AI chips sparked concerns about chip demand prospects; on the other hand, reports emerged that Meta CEO Mark Zuckerberg said at an internal all-hands meeting that the pace of AI agent development over the past four months had not met expectations. More critically, Meta was reported to be planning to sell idle AI computing power externally—a move interpreted by the market as a potential sign of overcapacity in AI infrastructure.

Savvy Wealth's Chief Investment Officer Anshul Sharma commented: "This could be money rotating from sectors that have performed well over the past few months into other areas, but I do think the market is re-evaluating the AI trade itself. If companies become more sensitive to computing costs, could that become their next area of focus?"

This statement reveals a deeper logic: over the past 18 months, the market assumed that AI computing demand would expand indefinitely, and chip stock valuations have significantly outpaced actual earnings. Once the "unlimited demand" hypothesis is challenged, the pressure for valuation contraction is quickly unleashed.

Fund Undercurrents: The Great Migration from AI Computing to Traditional Blue Chips

Where did the money flow after leaving the tech sector? Thursday's session provided a clear answer.

Traditional defensive sectors strengthened across the board. McDonald's surged over 4%, Coca-Cola and Johnson & Johnson gained over 3%, Walmart and Procter & Gamble rose 2%. The healthcare sector also strengthened, with AbbVie up nearly 4% and Merck up 3.34%. The defense and military sector collectively rallied, with Lockheed Martin surging 4%.

Significant divergence also appeared within large-cap tech stocks. Apple bucked the trend, surging 4.84% to close at $308.63, becoming the single largest contributor to the S&P 500's market cap that day; Microsoft rose 1.62%, Amazon rose 0.40%. But Tesla fell 7.49%, and Facebook fell nearly 5%. Apple's rise had its own supporting logic—market rumors that it might receive a chip procurement order from a major client—but more notably, even within the tech sector, funds were concentrating in names with more stable cash flows and relatively reasonable valuations.

The Russell 2000 small-cap index fell 0.5% to close at 2,996.11 points. This suggests that funds did not broadly trickle down to small- and mid-cap stocks but instead were highly concentrated in a few large-cap blue chips with stable cash flows and counter-cyclical traits.

The logical chain of sector rotation can be traced as follows: weakening nonfarm data → cooling rate hike expectations → theoretically bullish for growth stocks → but AI sector valuations at extreme levels → combined with rising uncertainty about AI demand prospects → funds choose to take profits on high-valuation tech positions → rotate into traditional blue chips with reasonable valuations and stable cash flows → the Dow hits new highs while the Nasdaq declines under pressure.

This is not a simple linear inference that "lower rate hike expectations are bullish for growth stocks," but rather a repricing of "which assets are truly worth holding."

Independence Day Holiday and Market Rhythm

It is important to note that because the 2026 U.S. Independence Day (July 4) falls on a Saturday, the U.S. financial markets are scheduled to be closed on Friday (July 3) as a compensatory holiday, with full-day closure of U.S. stocks. Trading for precious metals, U.S. crude oil, foreign exchange, and stock index futures contracts under the CME Group will end early at 1:00 a.m. Beijing time on July 4.

This means Thursday's trading was the last full trading day before the Independence Day holiday. The holiday effect is typically accompanied by shrinking trading volume and increased volatility—some investors choose to adjust positions before the long holiday, which may have exacerbated the degree of divergence that day. Total volume on U.S. exchanges on Thursday was 19.92 billion shares.

Conclusion: The End of Divergence Is Repricing

The Dow's historic high of 52,900 points and the Nasdaq's 0.8% decline occurring on the same trading day is not a "mispricing" by the market, but rather a signal that the market is repricing different asset classes.

The "shock" nonfarm payrolls data was merely the trigger; the real driving force is the market's reassessment of the return cycle for AI computing investment. Over the past 18 months, the expansion of semiconductor sector valuations was built on the narrative of "unlimited AI demand." As the marginal credibility of this narrative begins to decline, valuation contraction becomes inevitable. The flow of funds from AI semiconductors to traditional blue chips is essentially a re-evaluation of risk—not that AI has no future, but the market's pricing may have outpaced fundamentals.

For the crypto market, this divergence also carries implications. The improved liquidity expectations brought by the nonfarm data provided a short-term rebound catalyst for Bitcoin and Ethereum, but the continued outflow of institutional funds indicates that the macroeconomic narrative shift has not yet translated into real incremental capital. The risk appetite recovery for crypto assets still requires more confirmation signals from fundamentals.

After the Independence Day holiday, the market will face a new data window. The end of divergence is not a victory for one side, but the entire market searching anew for a pricing anchor that can reconcile all asset classes.

FAQ

Q1: Is it rare for the Dow to hit a record high while the Nasdaq falls at the same time?

A significant one-day divergence between the Dow and the Nasdaq is not common historically, but it does occur occasionally. This divergence is primarily driven by a massive rotation of funds from high-valuation AI semiconductor stocks into traditional blue chips, combined with the sharp drop in rate hike expectations triggered by the much-weaker-than-expected June nonfarm payrolls. The Philadelphia Semiconductor Index's nearly 11% decline over two days was the main force dragging down the Nasdaq.

Q2: What exactly were the U.S. June nonfarm payrolls? What impact on Fed policy?

The U.S. June nonfarm payrolls added only 57k jobs, far below the market expectation of 115k. After the data release, the market's implied probability of a Fed rate hike in July fell from about 33% to about 20%. However, the unemployment rate fell to 4.2%, indicating the labor market still has some resilience. A research report from CICC believes this data gives the Fed time to wait and see.

Q3: Why did chip stocks fall sharply for two consecutive days?

The two-day plunge in chip stocks was triggered by multiple factors: Anthropic's announced plan to develop its own AI chips, market concerns about the sustainability of AI computing demand, and reports that Meta plans to sell idle computing power externally, fueling fears of overcapacity. The deeper reason is that valuations in the AI semiconductor sector were at extreme levels, and the market began to question whether earnings could support current valuations.

Q4: Which sectors did funds flow into after leaving tech stocks?

Funds mainly flowed into traditional defensive sectors and blue-chip stocks with stable cash flows, including consumer staples like McDonald's, Coca-Cola, Johnson & Johnson, as well as healthcare and defense/military sectors. Apple, driven by procurement rumors, rose 4.84% against the trend and was one of the few large tech stocks favored by funds that day.

Q5: How did the U.S. Independence Day holiday affect trading?

Because Independence Day (July 4) in 2026 falls on a Saturday, U.S. financial markets were closed on Friday (July 3) as a compensatory holiday, with full-day closure of U.S. stocks. Some futures contracts on CME and ICE also ended trading early. Trading sessions before holidays are often accompanied by lower volume, which can amplify market volatility.