A technical bear market in semiconductors combined with uncertainty over Federal Reserve rate hikes—can Bitcoin break out of its independent rally?

In the early hours of July 21, Beijing time, all three major U.S. stock indexes closed lower. The Dow Jones Industrial Average fell 307.16 points, or 0.59%, to 51,839.26; the Nasdaq Composite declined 0.05% to 25,508.07; and the S&P 500 fell 0.19% to 7,443.28.

Behind this seemingly mild pullback lies more dramatic structural divergence. The Philadelphia Semiconductor Index (SOX) officially entered a technical bear market earlier in the week—down 20.2% from the historical closing high on June 22, with a nearly 10% decline in a single week. That marked the biggest one-week drop since the market crash triggered by the 2025 April Trump tariffs. Meanwhile, the U.S. Federal Reserve’s July rate decision is entering its final countdown, and market expectations about whether it will hike have swung violently within just a few weeks.

Three forces—policy uncertainty, the collapse of tech stocks, and the independent price action of crypto assets—are intertwining within the same time window, forming a market picture worth breaking down in depth.

Why does the Fed’s July rate decision carry so much suspense?

From July 28 to 29, 2026, the Federal Reserve will hold a Federal Open Market Committee (FOMC) meeting and release its rate decision. This will be the second policy meeting overseen by new chair Kevin Warsh since he took office.

Market expectations for the outcome of this meeting have swung dramatically over the past month. CME’s “FedWatch” tool showed on July 21 that the probability of the Fed keeping rates unchanged in July is 84.5%, while the probability of cumulative 25 basis point hikes is only 15.5%. This probability distribution has fallen significantly from a week earlier, when the odds of a rate hike were above 40%.

The key variable driving this shift is inflation data. U.S. June CPI and PPI both cooled more than expected, and the decline in core price indicators has removed the urgency for a July rate hike. In a recent report, Goldman Sachs chief economist Hazarus said the latest inflation data has “effectively ruled out” the possibility of a July meeting rate hike, and expects rates to be kept unchanged. JPMorgan strategists also said that “underlying inflation dynamics remain tame and should allow for the Fed to be patient.”

However, the suspense has not been fully eliminated. After three consecutive rate cuts in late 2025, the Fed kept the benchmark rate in the 3.50% to 3.75% range, and has held it steady throughout 2026 so far. In early July, Warsh made it clear at an ECB forum that “prices are still too high,” emphasizing that the Fed will not be satisfied with inflation above its 2% target. The minutes from the June FOMC meeting show that although the committee agreed unanimously to keep rates unchanged, there has been serious internal division, with some members supporting a rate hike.

By September, the probability the market assigns to keeping rates unchanged has fallen to 36%, while the probability of cumulative 25 basis point hikes has risen to 55.1%. That means the significance of the July meeting lies not only in the decision itself, but also in the forward guidance the Fed will release—this will determine the pricing benchmark for the subsequent policy path.

Structural concerns behind all three major U.S. indexes closing lower

The July 21 decline was not an isolated event. In the week before that, the S&P 500 fell 1.55%, the Nasdaq index dropped 2.9%, and the Dow Jones Industrial Average declined 0.93%.

The immediate trigger for that day’s drop was geopolitical risk. The U.S. launched military strikes against Iran for multiple consecutive days, and Trump said Iran would pay for the deaths of U.S. servicemembers; international oil prices consequently rose. Brent crude futures closed at $89.22 per barrel, up about 20% since the start of this month. The rise in oil prices intensified market concerns about inflation returning, and U.S. 10-year Treasury yields climbed to 4.608%.

But oil prices are only the surface factor. Deeper structural worries come from the ongoing deterioration in tech stocks—especially the semiconductor sector. From the March lows to the June highs, the Philadelphia Semiconductor Index surged 105%, doubling in just three months. The main logic behind this rally was the market’s extremely optimistic expectations for unlimited AI infrastructure spending. However, July 16’s TSMC second-quarter earnings call became the turning point—despite quarterly revenue of $402 billion and net profit up over 77% year over year, after TSMC raised its full-year capital expenditure guidance sharply, the market reaction was the opposite: TSMC’s U.S.-listed ADR fell 2.3% at close, and the SOX plunged 4.3% in a single day.

The logic behind market worries is not complicated: when the industry’s leading company needs such aggressive capital investment to sustain AI chip supply, investors start asking when these expenditures will translate into substantial profit returns. Goldman Sachs’ head of asset allocation research characterized this selloff as “one of the largest momentum strategy selloffs on record.” The main reason is not deterioration in fundamentals, but rather large-scale position closures by hedge funds and mutual funds pairing trades “going long semiconductors and short hyperscale cloud computing companies”—the hottest paired trade of the year.

Darrell K. Klanck, president of the Wealth Management Investment Research Institute, said: “Semiconductor and AI trades are undergoing a healthy reality check. The recent worsening in technicals increases the risk of a deeper pullback toward longer-term support levels.”

What does the Philadelphia Semiconductor Index entering a technical bear market mean?

The definition of a technical bear market is relatively mechanical—pullbacks of 20% or more from recent highs. But the importance of the SOX entering a bear market goes far beyond the definition itself.

First, it represents a systemic shake-up of sentiment in global risk assets. The SOX doubled within three months and was one of the strongest asset classes in the first half of 2026. When the “most crowded trade” starts to unwind, its shockwaves spread through multiple channels to other risk assets.

Second, outflows from leveraged ETFs create a self-reinforcing negative feedback loop. According to Kobeissi Letter data, the assets under management of leveraged semiconductor ETFs have fallen from about $163 billion at the June peak to $100 billion, a cumulative reduction of about $63 billion, down 39%. Among all leveraged ETF fund outflows in the U.S., semiconductor ETFs account for as much as 63%. When leveraged ETFs face large-scale redemptions, fund managers need to sell underlying assets to meet liquidity demand, further pressuring chip stock prices.

Third, the SOX valuation level still remains at historic highs. The Philadelphia Semiconductor Index’s price-to-earnings ratio has fallen to 39.27, and the Nasdaq’s P/E has fallen to 39.1—both still close to the key 40 level. The SOX forward P/E is around 26x, far above the 10-year average of 19x. This means that even after a sharp pullback, valuation contraction may not be complete.

Are Bitcoin and U.S. stocks heading toward decoupling or re-coupling?

The correlation between Bitcoin and the Nasdaq is undergoing violent swings, which may be one of the most important variables in the current market.

In April 2026, Bitcoin and the Nasdaq’s 30-day rolling correlation once reached a record high near 0.96—almost implying they move fully in sync statistically. At that time, Bitcoin’s functional essence was essentially an amplified version of tech-stock risk exposure. However, by early June, this coefficient had fallen to nearly zero. Bitcoin’s 30-day correlation with the S&P 500 dropped from near 0.8 in early May to about 0.5.

This dramatic swing from extremely high correlation to near decoupling was completed in less than two months. On June 5, the crypto market’s total market cap evaporated 8.7% over one week to $2.29 trillion, while during the same period the Dow and S&P 500 both hit record closing highs. Crypto assets did not rise alongside U.S. stocks—breaking the “up together, down together” linkage pattern seen over the prior several years.

Entering July, this divergence trend has continued. On July 21, Bitcoin reclaimed the $65,000 level, trading around $65,317 (+0.88%), while all three major U.S. indexes closed lower. The Fear and Greed Index remains in the “extreme fear” range of 25, but the crypto market is showing price resilience different from that of U.S. stocks.

The Charles Schwab digital currency research team said that U.S. stock shares have repeatedly made new highs driven by the AI tech wave, while Bitcoin has fallen nearly 50% from its historical high from last October. The “stocks-versus-coins decoupling” phenomenon has drawn widespread attention. Some analysts point out that Bitcoin’s 30-day correlation with the S&P 500 is currently about 0.6 to 0.7, meaning it is in a “down together, up separately” state—when U.S. stocks fall, crypto assets often follow; but when U.S. stocks grind higher to new highs, crypto assets may not keep pace.

How do triple divergences reshape crypto asset pricing logic?

The market is currently showing at least three layers of divergence:

First layer of divergence: between policy expectations and market pricing. Market expectations for a July rate hike collapsed from over 40% to 15.5%, but expectations for a September rate hike rose to 55.1%. This “no move this month, move next month” expectation structure itself implies the market lacks certainty in judging the inflation path.

Second layer of divergence: structural divergence within traditional assets. The S&P 500 fell only 0.19%, but the semiconductor sector has entered a technical bear market. Mild declines at the index level mask sharp adjustments at the sector level. Funds are moving out of high-valued semiconductor and memory stocks and into sectors that are more directly benefiting from economic resilience, such as financials, retail, and transportation.

Third layer of divergence: divergence between Bitcoin and U.S. stocks. Bitcoin was highly synchronized with the Nasdaq in April 2026 (correlation coefficient 0.96), but now it is trying to move into an independent trading trend. The drivers behind this divergence are multiple: the AI narrative has dominated capital flows toward tech stocks while bypassing Bitcoin; Bitcoin’s unique supply pressure (miners’ holdings, long-term holder behavior) is playing a role; and crypto’s own structural changes—especially the introduction of spot ETFs—fundamentally changed the demand structure, shifting the market’s driving force from the supply side to the demand side.

In a June 2026 report, Deutsche Bank explicitly stated that Bitcoin “is increasingly behaving like an institutional risk asset rather than speculation driven by retail investors.” This judgment implies Bitcoin’s pricing logic is shifting from “retail-narrative-driven” to “macro-factor-driven”—and macro factors are precisely the most uncertain variables right now.

How the mega earnings week and geopolitical risk may influence the market direction

In the coming week, the market will face three tests at the same time.

First test: earnings from tech giants. Alphabet, the parent company of Google, will release earnings on July 22 first, followed by giants like Microsoft, Amazon, and Meta. The market urgently needs clear signals to confirm whether AI investment returns for tech giants are sustainable. These earnings will directly determine whether the semiconductor sector can stop the slide—if the giants confirm they will continue large-scale investment in AI infrastructure, chip stocks may get support; if they release signals that capex will slow, the SOX bear market could deepen further.

Second test: geopolitical risk. The U.S.-Iran conflict is still ongoing, and oil prices have surged by about 20%. Continued upward pressure on oil prices will reignite inflation concerns, which in turn will affect the Fed’s policy path. On July 30, the FOMC rate decision, core PCE, and the annualized U.S. second-quarter GDP figure will all be released at the same time—these three datasets will deeply influence how the market assesses inflation and the economic outlook.

Third test: crypto assets’ own structural evolution. SpaceX officially joined the Nasdaq 100 index on July 7, and its balance sheet holds 18,712 Bitcoins. The number of companies in the Nasdaq 100 with a Bitcoin treasury has increased to three (SpaceX, Tesla, and Strategy). By including the index, the demand created is determined by rules rather than active allocation. This structural change could alter the long-term correlation pattern between Bitcoin and U.S. stocks.

Summary

Ahead of the Fed’s July rate decision, the market is undergoing a multi-layered repricing. The S&P 500’s mild decline masks a deep bear market in semiconductors, while Bitcoin’s correlation with U.S. stocks swinging from 0.96 to near zero reveals a complex transition of crypto assets from a “tech-stock amplifier” toward an independent asset class.

Triple divergence—divergence between policy expectations and market pricing, divergence within traditional assets, and divergence between Bitcoin and U.S. stocks—collectively forms the core characteristic of the current market. The eventual direction of these divergences will face key verification in the coming week: earnings from tech giants will test the sustainability of the AI narrative; the Fed’s decision will clarify the direction of the interest-rate path; and whether crypto assets can build an independent trading trend amid macro uncertainty will determine their final positioning as an asset class.

For market participants, rather than trying to predict the direction of any single variable, it may be better to examine how these variables interact—when policy, geopolitics, technology, and capital flows intertwine within the same time window, the true risks and opportunities often hide in the gaps created by divergences.

FAQ

Q1: Will the Fed raise rates in July?

According to CME’s “FedWatch” data from July 21, the probability of the Fed holding rates unchanged in July is 84.5%, and the probability of a 25 basis point rate hike is 15.5%. Most investment banks believe the latest inflation data has largely ruled out a July hike. But expectations for a September hike have risen to 55.1%, and there remains significant disagreement in the market about the subsequent policy path.

Q2: Why did the Philadelphia Semiconductor Index enter a technical bear market?

Since the June 22 historical high, SOX has pulled back 20.2% cumulatively. The main drivers include: growing concerns about the sustainability of AI capital expenditure; large-scale unwinds of the paired trade “long semiconductors, short hyperscale cloud computing companies” by hedge funds and mutual funds; and a negative feedback loop formed by large outflows from leveraged semiconductor ETFs.

Q3: Have Bitcoin and U.S. stocks really decoupled?

Bitcoin and the Nasdaq’s 30-day rolling correlation coefficient has fallen from the 0.96 peak in April 2026 to near zero. Currently, they are in a “down together, up separately” state—when U.S. stocks fall, crypto assets often follow, but when U.S. stocks rise, crypto assets may not keep pace. Institutions such as Charles Schwab have defined this phenomenon as “stocks-versus-coins decoupling.”

Q4: What impact does the semiconductor bear market have on crypto assets?

The semiconductor bear market affects the crypto market through multiple channels: large capital outflows from leveraged ETFs drain liquidity from the market; the cooling of the AI narrative directly impacts the valuations of crypto projects related to AI; and the overall contraction in risk appetite puts pressure on crypto assets as a high-beta allocation. But Bitcoin’s recent price resilience also suggests crypto assets are trying to move toward a pricing logic independent of traditional tech stocks.

Q5: What key events should be watched in the coming week?

The mega earnings week begins with Alphabet earnings on July 22; the FOMC rate decision will be released from July 28 to 29; and on July 30 core PCE and the annualized U.S. second-quarter GDP rate will be released at the same time. These three groups of events together will determine the market’s short-term pricing benchmarks for inflation, interest rates, and economic growth.