Nasdaq's 3.2% July slide leaves AI rebound on short-covering footing

The Nasdaq Composite fell 3.2% in July, its worst month since March, as inflation and AI-spending doubts outweighed a rebound Goldman calls short covering.

"The buying last week was more gross down than new long positioning," said Brian Garrett, derivatives strategist at Goldman Sachs. "Short covering to fresh buying in the derivatives market ran about two to one."

The S&P 500 slipped 0.1% in July while the Dow rose 0.3%, masking a deeper rotation: the equal-weight S&P 500 gained 1.3% as seven of 11 sectors posted gains, with information technology, industrials, materials and utilities the laggards. The Nasdaq-100 fell more than 7% in July, its steepest monthly drop since March 2025, and the Philadelphia Semiconductor Index lost 21 percent — the worst month since 2008. Global leveraged ETF assets have shrunk about $600 billion, or 28 percent, since June, with net exposure down roughly $170 billion.

Friday's session offered a partial reprieve — the S&P 500 rose 0.7% as Amazon jumped 15.3% on strong cloud results, while Apple slid about 7% on supply constraints. Whether the rebound holds depends on this week's July payrolls report, forecast at 83,000 new jobs with unemployment at 4.3 percent, and the direction of the 10-year Treasury yield, which touched a 1.5-year high of 4.75 percent.

Inflation Returns as the Market's Dominant Risk

Callie Cox, chief market strategist at Ritholtz Wealth Management, said investors should brace for more volatility because inflation has re-emerged as the dominant force driving equities. June CPI and PCE readings cooled, but a rebound in oil prices in July threatens to reverse that progress. "Inflation is the biggest risk to equity portfolios right now, and growth lacks resilience into year-end," Cox said.

The AI buildout itself is adding cost pressure. Brian Kersmanc, portfolio manager at GQG Partners, said data centers and AI infrastructure are consuming rising volumes of memory chips and other inputs, costs companies may pass on to customers. "Inflation is largely sentiment-driven," Kersmanc said. "The longer it persists, the more self-reinforcing it becomes." For rate-sensitive chip stocks, whose earnings sit far in the future, higher discount rates compress the present value of those cash flows sharply.

Tech Earnings Split the AI Trade

Last week's megacap results exposed a widening gap within the AI trade. Apple lost about $50 billion in market value in a single session and Meta fell nearly 8 percent, while Amazon and Microsoft each surged more than 15 percent — Microsoft's gain set a record single-day market-cap increase of roughly $550 billion. The divergence reflects which companies can show cash flow from AI spending versus those whose growth rests on hardware demand.

Jay Hatfield, chief executive and chief investment officer at Infrastructure Capital Advisors, attributed the rotation to the geopolitical overhang. "With war looming, the market can only rotate," he said. He warned that hedge-fund deleveraging may not be finished, keeping selling pressure alive.

Garrett is positioning for a slow grind higher — buying downside volatility and three-month S&P 500 upside options — on the assumption that the systematic deleveraging cycle is nearing its end. But he flagged key support at 7,445 and 7,215 on the S&P 500, and said the payrolls data and rate direction will determine whether Friday's bounce was real demand or just a position clearing.

This article is for informational purposes only and does not constitute investment advice.