U.S. equities clawed back ground Wednesday, with the S&P 500 up 0.5% as a fresh wave of artificial intelligence dealmaking offset an ugly session for high-multiple software and cybersecurity stocks. It was a day of two very different stories: one where AI hardware and dealmaking can't lose, and another where software companies can't win, even when they beat expectations.
The S&P 500 rose 0.5% to 7,668.79, while the Dow Jones Industrial Average advanced 235 points, or 0.4%, to 53,002.29. The Nasdaq 100 fell 0.2% to 29,012.77. Small caps outperformed, with the Russell 2000 up 0.9%, a sign that the selling was concentrated in the high-flying growth names.
Within Magnificent Seven stocks, NVIDIA Corp. (NVDA) surged 4.7% to $227.66 on reports it is in advanced talks to acquire Hugging Face for $14 billion. The move underscores Nvidia's ambition to dominate not just the chips but the entire AI software ecosystem, and investors clearly liked what they heard.
But the broader market is still wrestling with a macro story that's turning decidedly hawkish. Rate-hike expectations remain the dominant macro story and the direct cause of the growth-stock carnage. Futures are pricing a roughly 66% probability that the Federal Reserve raises rates by 25 basis points later this month, up sharply from about 40% a week ago, after Fed Chair Kevin Warsh used his Jackson Hole address to recommit to fighting inflation. That's a big shift in a short time, and it's hitting the stocks that are most sensitive to future cash flows the hardest.
Wednesday's data cut the other way, though. ADP showed private payrolls rose just 38,000 in August, the weakest since January and below the 47,000 consensus, while July factory orders climbed 0.9% versus the 0.6% expected. So the economy is cooling, but the Fed is still talking tough. That's a confusing mix for markets, and it's showing up in the tape.
On the geopolitical front, the U.S. said it launched overnight airstrikes on Iranian targets, Tehran retaliated, and reports of hits on tankers near the strait kept a war premium embedded in crude. West Texas Intermediate crude rose 0.6% to $90.78 a barrel, holding near six-week highs. Brent added 1.0% to $95.55. The situation remains fluid, and any escalation could send oil higher, which would only add to inflation pressures.
The bond market took a breather without giving much back. The 10-year Treasury yield held at 4.81% after a five-session run to its highest level since October 2023, while the 5-year sat at 4.56%. Yields at these levels are a headwind for growth stocks, and they're not showing much sign of retreating.
Gold rebounded 1.0% to $4,372.53 an ounce, recovering from a one-month low as the dollar retreated, though the metal remains down 4.9% over the past week. Gold's bounce suggests some safe-haven buying, but the broader trend is still lower as real yields rise.
Markets now await Broadcom Inc. (AVGO)'s quarterly results after the bell. Broadcom is another AI bellwether, and its guidance will be scrutinized for signs that the AI capex boom is slowing. If Broadcom disappoints, the AI trade could take a hit; if it delivers, it might help calm the software jitters.
Wednesday's Performance In Major U.S. Indices
According to market data:
- The Vanguard S&P 500 ETF (VOO) gained 0.5%.
- The SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.4%.
- The Invesco QQQ Trust (QQQ) slipped 0.2%.
- The iShares Russell 2000 ETF (IWM) rallied 0.9%.
Beat The Number, Lose The Multiple: Software Punished Anyway
Let's talk about the sector action, because it tells a clear story. The Materials Select Sector SPDR Fund (XLB) was the best performer, up 1.9%, ahead of the Communication Services Select Sector SPDR Fund (XLC), up 1.7%. Materials and comms are benefiting from different tailwinds: materials from gold's bounce and commodity strength, comms from a rebound in some big media and internet names.
The Consumer Staples Select Sector SPDR Fund (XLP) added 0.9%, the Financial Select Sector SPDR Fund (XLF) rose 0.8% as a steeper curve lifted bank margins, and the Health Care Select Sector SPDR Fund (XLV) gained 0.7%. Defensive sectors holding up is another sign that investors are rotating out of the most crowded trades.
Three sectors sat in the red. The Real Estate Select Sector SPDR Fund (XLRE) fell 0.5%, while the Technology Select Sector SPDR Fund (XLK) and the Utilities Select Sector SPDR Fund (XLU) each slipped 0.2%. Tech's decline is notable because it's being dragged down by software, not hardware. Utilities are suffering from the California utility mess, which we'll get to.
The Energy Select Sector SPDR Fund (XLE) rose 0.3% and remains the runaway 2026 leader, up 47.3% year-to-date against XLK's 27.7%. Energy's strength is a direct reflection of the geopolitical premium in oil, and it's been a consistent winner all year.
At the industry level, the VanEck Gold Miners ETF (GDX) led with a 2.4% advance as bullion bounced. The U.S. Global Jets ETF (JETS) climbed 1.5% and the VanEck Agribusiness ETF (MOO) rose 1.5%, while the SPDR S&P Insurance ETF (KIE) gained 1.2%. On the losing side, the First Trust Dow Jones Internet Index Fund (FDN) fell 0.3%, reflecting the weakness in high-growth internet names.
Now, the main event: the software and cybersecurity carnage. Credo Technology Group Holding Ltd (CRDO) was the session's worst performer, collapsing 18.7% to $168.09 in its first full session after Tuesday's print. Credo is an AI connectivity supplier, and it posted record fiscal first-quarter revenue and net income on strength in active electrical cables, optics and retimers, with adjusted EPS of $1.20 against a $1.17 consensus. It also guided to more than 85% year-over-year revenue growth with optical revenue above $600 million in fiscal 2027. That's a fantastic quarter by almost any measure. But the beat was not enough given the market's lofty expectations for the futures. The stock had run up so much into the print that even a blowout couldn't justify the price.
MongoDB, Inc. (MDB) told a near-identical story, tumbling 11.9% to $382.62. Second-quarter fiscal 2027 revenue rose 30% to $771.8 million versus the $732.9 million consensus, adjusted EPS came in at $1.90 against $1.61 expected, Atlas revenue grew about 29% and the company added a record 2,900 net new customers to reach 70,600. MongoDB also raised full-year revenue guidance to $2.99 billion to $3.03 billion and adjusted EPS to $6.39 to $6.58, both above Street estimates. Investors sold it anyway, focusing on rising AI infrastructure costs. The market is essentially saying: "Great, you're growing, but at what cost? And is that growth sustainable if AI spending slows?"
Palo Alto Networks, Inc. (PANW) completed the set, sinking 10.3% to $324.88. Fiscal fourth-quarter adjusted EPS of $1.02 topped the 98 cent estimate on revenue of $3.41 billion versus $3.35 billion, with next-generation security ARR up 63% to $9.10 billion and remaining performance obligations of $21.2 billion. Fiscal 2027 guidance of $14.10 billion to $14.20 billion in revenue and $4.16 to $4.19 in adjusted EPS could not hold a stock that had run hard into the print. Palo Alto is a great company, but it's priced for perfection, and any hint of a slowdown is punished mercilessly.
The damage spread across the cybersecurity and software complex. Fortinet Inc. (FTNT) dropped 5.6%, CrowdStrike Holdings Inc. (CRWD) lost 5.2%, Datadog Inc. (DDOG) fell 5.5% and ServiceNow Inc. (NOW) slid 4.1%. These are all high-quality companies, but they're all trading at multiples that leave no room for error. When the market starts worrying about rates, these are the first to get sold.
Palantir Technologies Inc. (PLTR) tumbled 7.2% to $166.91. Palantir is another stock that's been a massive winner, and it's particularly sensitive to rate fears because so much of its value is tied to future growth.
California utilities extended their collapse. PG&E Corporation (PCG) sank another 8% and Edison International (EIX) lost 6.5%, adding to Monday's 18% and 23% routs after California's SB 492 advanced without the $6 billion per-incident liability cap or the Wildfire Fund replenishment mechanism investors had expected. This is a regulatory nightmare for these companies, and the market is pricing in significantly higher risk. The lack of a liability cap means utilities could be on the hook for massive wildfire damages, which is a existential threat to their business models.
On the other side of the ledger, GitLab Inc. (GTLB) was the day's best performer, soaring 12.9% to $50.91 after fiscal second-quarter revenue rose 21% to $286.3 million versus the $273.1 million consensus and adjusted EPS of $0.24 beat the $0.18 estimate. GitLab's beat was solid, but the stock had been beaten down so much that any good news was a relief. It's a reminder that sometimes the market rewards companies that simply meet expectations, especially if they've been sold off.
Dell Technologies Inc. (DELL) jumped 7.9% to $458.34 on record fiscal second-quarter revenue of $47.0 billion, up 58% year-over-year, and non-GAAP EPS of $7.04 against a $4.87 consensus. Dell booked $60.9 billion in AI server orders during the quarter, exited with a record $95 billion backlog, and lifted full-year fiscal 2027 revenue guidance by $25 billion to a $192.0 billion midpoint. Dell is a direct beneficiary of the AI infrastructure buildout, and its numbers show that demand is still exploding. The contrast with software stocks couldn't be starker: hardware companies are seeing orders surge, while software companies are seeing costs rise.
Sirius XM Holdings Inc. (SIRI) rose 7.8% to $29.77 after Deutsche Bank upgraded the Berkshire Hathaway-backed audio company and set a $45 price target. That's a big vote of confidence, and it shows that even in a tough tape, there are opportunities in less crowded names.
Wednesday's Russell 1000 Top Gainers
Wednesday's Russell 1000 Top Losers
So what's the takeaway? The market is in a phase where it's rewarding companies that are directly monetizing AI infrastructure (Nvidia, Dell) and punishing those that are spending heavily on AI (software, cybersecurity). It's a rotation within the AI trade, not a rejection of it. And with rate hike odds rising, the pressure on high-multiple stocks is only going to intensify. The next few weeks will be crucial: if the Fed does hike, we could see more of this divergence. If it doesn't, the software names might get a reprieve. Either way, it's a market that's demanding proof of profitability, not just promises of growth.
