The Dow Jones ends five-day winning streak, storage chip and AI software stocks hit by "earnings massacre", expectations for Federal Reserve rate hike suddenly rise

On August 6, Eastern Time, all three major U.S. stock indices closed lower. The Dow Jones fell 0.85% to 53,885.10 points, ending a five-day winning streak; the S&P 500 dropped 0.18% to 7,709.96 points, and the Nasdaq was down slightly by 0.06% to 26,348.35 points.

The trading looked calm, but the underlying structure was fractured—on one side, Microsoft surged 2.54% to a new high since last November, and SpaceX rebounded 6.14%, pushing its market value back above $1.5 trillion; on the other side, memory chips and AI application software stocks were "collectively slaughtered": Western Digital plunged 13.03%, SanDisk dropped 6.81%, SK Hynix ADR fell nearly 5%, and Micron Technology declined over 1%. AppLovin and Datadog, both labeled as "AI application leaders," plummeted by 19.66% and about 17%-19% respectively.

Beating Earnings Still Get Sold: When "Good" Is Not "Good Enough"

The plunge in Western Digital and SanDisk was the most eye-catching case of the day. Both companies announced quarterly results after the bell on Wednesday that topped expectations, and their next-quarter revenue guidance was also above analyst consensus. However, this couldn’t stop their stock rout. Citibank and Jefferies subsequently lowered their SanDisk price targets, pointing out that although its fiscal Q4 performance was strong, the guidance was lackluster. A deeper reason lies in the fact that Western Digital had risen over 500% in the past year, and SanDisk surged even more; the market had already priced in extremely high expectations. When results are only "good" and not "astonishing," profit-taking pressure is unleashed. Cboe retail business chief JJ Kinahan remarked: “When guidance is soft, beating on profits and revenue may not lift the stock price.” Haverford Trust investment strategy head Hank Smith believes that chip stocks have gained too much in the first half of the year with very high market expectations, and the current trend reflects a digestion of their valuations.

AI application software stocks suffered an even more direct hit. Marketing tech platform AppLovin’s stock plunged 19.7% due to quarterly revenue missing expectations. Cloud security company Datadog, despite achieving 36% revenue growth and raising its guidance, still sank about 17% as it forecast a slowdown in third-quarter revenue growth. These two companies became the main drags on the S&P 500 index that day. This sends a clear signal: after several quarters of AI hype, the market is shifting from the "storytelling" stage to a strict scrutiny of earnings execution.

The Fed Turns Hawkish: Rate Hike Expectations Rattle Markets

What moves the market even more than earnings reports is the Federal Reserve's unexpected policy shift. In the early morning of August 7, Beijing time, Alberto Musalem, President of the St. Louis Fed, said, “The probability that inflation will remain above target has increased, and I was inclined to hike rates at the recent policy meeting.” He further noted that “gradual rate hikes are less costly than sudden moves,” and there is “an environment with risks of inflation expectations becoming unanchored.” Musalem emphasized that the U.S. economy has shown resilience in recent months, “It is a mistake to pursue expansionary policies for higher GDP,” and future AI-driven productivity growth is highly uncertain, with risks “tilted to the upside for inflation.”

According to the British Financial Times, should inflation data run hot in the coming weeks and expectations for rate hikes intensify, Fed Chair Kevin Walsh is already prepared to raise rates at the September meeting. According to data from CME Group, the futures market currently expects about a 55% chance of a 25 basis point hike at the September meeting. Bank of America CEO Brian Moynihan was even more aggressive when interviewed by CNBCInterview, expecting the Fed to hike rates in September, November, and December. However, San Francisco Fed President Mary Daly observed signs that the tariff impact on U.S. prices is beginning to fade, and if this trend continues, it may help ease upside inflationary pressures.

More Geopolitical Uncertainty: Oil Price Gambit in the Strait of Hormuz

International oil prices surged again on the same day, with the NYMEX WTI crude oil futures front-month contract rising 4% to $78.23 per barrel. Earlier, Iran’s authorities released a restrictive draft on shipping management through the Strait of Hormuz, which would ban the passage of vessels from the U.S., Israel, and other hostile countries. However, according to Xinhua News Agency, Iran and Oman have agreed on the geographical coordinates for proposed shipping routes in the Strait of Hormuz, and a joint statement has entered the final review stage—but Iran emphasized that finalizing the arrangement does not mean the strait will be reopened immediately. Deutsche Bank strategist Jim Reid stated that the market has seen multiple “false dawns” during this round of Middle East tensions. SummitTX Capital trading chief Robert Bernstone pointed out: "Market reactions to macro news may be more subdued than before... Tweets and news headlines do move markets, but the real key is in the details."