By Ankika Biswas and Johann M Cherian
(Reuters) -The Nasdaq dropped 1% on Tuesday as chip and megacap shares took a hit ahead of Big Tech earnings, while strength in financial stocks kept the Dow afloat in anticipation of a key U.S. Federal Reserve policy decision this week.
Microsoft (O:MSFT), widely seen as a frontrunner in the artificial intelligence race, will release its quarterly results after markets close. Its stock was down nearly 1%.
Other megacap stocks such as Apple (NASDAQ:AAPL) , Amazon.com (NASDAQ:AMZN), Meta (NASDAQ:META) Platforms , Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) also fell between 0.10% and 2%, as investors refrained from big bets ahead of tech earnings scheduled through the week.
AI favorite Nvidia (NASDAQ:NVDA) slumped 5%, leading a sharp erosion in chip stocks and pushing the Philadelphia SE Semiconductor index down 2.4%.
At 11:30 a.m. the Dow Jones Industrial Average rose 65.08 points, or 0.16%, to 40,605.01, the S&P 500 lost 24.87 points, or 0.46%, to 5,438.67 and the Nasdaq Composite lost 184.53 points, or 1.06%, to 17,185.68.
The S&P 500 Financials index outperformed its sectoral peers with a 1.3% jump, with an index tracking banks also climbing 1.5%.
Coupled with Tesla's disappointing results, Alphabet's higher expenditure forecast induced a broad-based market sell-off in the previous week, driven largely by megacap stocks.
The bar is set high for these highly valued technology behemoths, whose quarterly results will be scrutinized for signs they have the momentum to spur further AI-led equity rallies.
"Big Tech has had a great rally and for it to continue, they're going to have to show benefits of AI and the investments they made in it," said Brian Klimke, chief market strategist at Cetera Investment Management.
"If not, we could see more of a rotation into smaller cap stocks and value stocks."
Hopes of early rate cuts have prompted an investor run to mid- and small-cap stocks and away from market dominating tech-related sectors.
The Russell 2000 small-caps index advanced 0.2% and is poised to sharply outperform the three major U.S. stock indexes in July, while the Dow is set for its best month so far in 2024.
The continued improvement in inflation and an easing jobs market have bolstered expectations of the Fed signaling a cut in September in its policy decision on Wednesday. Odds of a 25-basis-point cut are at 88%, according to CME's FedWatch Tool.
On the data front, a Job Openings and Labor Turnover Survey pointed to 8.18 million job openings in June, compared to economists' expectation of 8 million, ahead of Friday's Non-farm Payrolls reading.
Among single stocks, Procter & Gamble (NYSE:PG) slumped 6% after missing expectations for fourth-quarter sales.
Merck lost 10% after the drugmaker cut its annual profit forecast, while CrowdStrike (NASDAQ:CRWD) shed 9% after a report that Delta Air Lines (NYSE:DAL) sought compensation from Microsoft and the cybersecurity firm for the global cyber outage earlier this month.
Cybersecurity and cloud services company F5 jumped 11.2% after forecasting fourth-quarter results above estimates.
Advancing issues outnumbered decliners by a 1.16-to-1 ratio on the NYSE, and by 1.31-to-1 on the Nasdaq.
The S&P 500 posted 62 new 52-week highs, while the Nasdaq Composite recorded 92 new highs and 80 new lows.