Dow sinks 1,100 points as Fed holds rates, chip stocks extend losses

US stocks closed sharply lower on Wednesday as investors reacted negatively to the Federal Reserve's decision to leave interest rates unchanged, while rising Treasury yields and renewed concerns over inflation weighed on market sentiment.

The Dow Jones Industrial Average fell 1,152 points, or 2.2%, marking its biggest one-day decline since April 2025.

The S&P 500 lost 1.5%, while the Nasdaq Composite dropped 1.7%.

The Federal Reserve kept its benchmark interest rate unchanged at 3.50%-3.75%, despite three members of the Federal Open Market Committee favoring a quarter-percentage-point increase.

Following the decision, Treasury yields climbed sharply as investors reassessed the outlook for inflation and monetary policy.

The benchmark 10-year Treasury yield rose more than 6 basis points to above 4.66%, while the 30-year Treasury yield climbed more than 10 basis points to above 5.2%, its highest level since 2007.

Markets are increasingly pricing in the possibility of a rate increase at the Fed's September meeting as inflation remains above the central bank's target and higher energy prices continue to complicate the policy outlook.

Oil surge and chip weakness pressure broader market

Rising oil prices added to inflation concerns after geopolitical tensions in the Middle East intensified.

West Texas Intermediate crude settled more than 6% higher at $84.46 per barrel after President Donald Trump said the United States would respond to attacks on US troops in the Middle East.

Higher crude prices reinforced investor concerns that inflationary pressures could remain elevated, increasing the likelihood of further monetary tightening.

Semiconductor stocks also remained under heavy pressure, extending a broader sector sell-off that has intensified in recent weeks.

The iShares Semiconductor ETF (SOXX) dropped 5.5%, marking its fifth consecutive losing session.

Investors have continued to question whether massive artificial intelligence infrastructure spending will generate sufficient returns while also monitoring growing competitive pressure from China.

Micron Technology and KLA each declined around 10%, while AMD lost 5.5%.

The sector also faced additional pressure after South Korean chipmaker SK Hynix reported quarterly profit that, despite rising sharply from a year earlier, failed to meet elevated investor expectations.

AI infrastructure company Vertiv also fell after reporting quarterly revenue below analyst estimates.

Earnings remain resilient despite market volatility

Despite the market sell-off, the second-quarter earnings season has generally remained strong.

According to LSEG data, analysts expect aggregate S&P 500 second-quarter earnings to grow about 40% from a year earlier, with AI-related companies contributing significantly to that growth.

Approximately 20 times forward earnings, the S&P 500's valuation remains only modestly above its 10-year average of 19 times expected earnings.

Investors also continued to monitor earnings from major technology companies, with Microsoft and Meta Platforms scheduled to report results after Wednesday's closing bell.

Their earnings are expected to provide further insight into AI spending trends and whether heavy investment in artificial intelligence infrastructure is translating into financial returns.

Among individual stocks, Ford Motor gained after raising its annual profit outlook for the second time this year.

Visa advanced after reporting quarterly earnings that exceeded expectations, supported by stronger travel demand linked to the World Cup.