By Noel Randewich and Lisa Pauline Mattackal
(Reuters) -The Nasdaq ended sharply lower on Thursday, hit by losses in Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) as investors rotated into smaller companies after softer-than-expected inflation data fed bets the Federal Reserve will cut interest rates in September.
The S&P 500 also lost ground after a Labor Department report showed U.S. consumer prices fell unexpectedly in June and the annual increase was the smallest in a year, drawing the Fed closer a September rate cut. The Dow finished with modest gains.
Interest rates futures suggest traders see an over 90% chance the Fed will cut rates by its September meeting, up from about 74% on Wednesday, according to CME Group's (NASDAQ:CME) Fedwatch.
Despite signs of receding inflation, Wall Street's most valuable companies lost ground, with Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) each losing more than 2% and Meta (NASDAQ:META) Platforms dropping about 4%.
Tesla tumbled 8.4%, its biggest one-day percentage drop since January, after Bloomberg News reported the company is delaying the launch of robotaxi by about two months to October.
Apple fell 2.3% after hitting a record high on Wednesday. BofA Global Markets raised its price target for Apple, saying it expects strong iPhone sales driven in part by new AI features.
As sky-high tech-related stocks fell on Thursday, shares of smaller companies rallied.
The small cap Russell 2000, which has significantly lagged the benchmark index in 2024, jumped 3.6% to close at its highest since March 2022, with investors betting rate cuts would improve conditions for smaller companies.
"What I think investors now believe is that the Fed is ready to start to cut interest rates. And so they are saying, 'That's good enough for me. I don't have to wait for them to actually do it'," said Sam Stovall, chief investment strategist at CFRA Research.
Volume on U.S. exchanges was heavy, with 12.6 billion shares traded, compared to an average of 11.5 billion shares over the previous 20 sessions.
The S&P 500 declined 0.88% to end the session at 5,584.54 points.
The Nasdaq declined 1.95% to 18,283.41 points, while Dow Jones Industrial Average rose 0.08% to 39,753.75 points.
Thursday's declines ended a seven-day streak of record high closes for the Nasdaq and a six-day streak for the S&P 500. It was the Nasdaq's biggest one-day percentage drop since April 30.
The S&P 500 real Estate index surged 2.7%, trimming year-to-date losses to 1%. The communication services and information technology indexes each fell more than 2%.
Delta Air Lines (NYSE:DAL) slumped 4% after forecasting lower-than-expected profits in the current quarter.
Other major airline stocks also fell, with an index of S&P 500 passenger airline companies down 2.7%.
"This might be a place where consumers are getting pinched by inflation. That's showing up in discretionary funding on things like air tickets," said Scott Helfstein, head of investment strategy at Global X.
Investors are awaiting Producer Price Index data on Friday for insights into the inflation trajectory, along with second-quarter earnings from big banks.
Citigroup slipped 1.9% after U.S. bank regulators fined the lender $136 million.
Conagra Brands fell 1.5% after the packaged foods maker forecast annual revenue and profit below estimates.
Advancing issues outnumbered falling ones within the S&P 500 by a 3.7-to-one ratio.
The S&P 500 posted 51 new highs and 2 new lows; the Nasdaq recorded 141 new highs and 50 new lows.