The third quarter opened with a reshuffling, not a retreat.
US markets closed modestly lower on Wednesday — the Dow slipped just 14 points after touching a new all-time intraday high of 52,742.66, the S&P 500 dipped 0.22%, and the Nasdaq gave back 0.66%. But the headline numbers masked a session far more dynamic than a quiet red day. Beneath the surface, 32 S&P 500 stocks hit fresh 52-week highs against just 5 new lows. Communication services surged 2.6%, financials gained nearly 2%, and Meta Platforms ripped 8.8% on a report that could reshape the entire cloud computing landscape. The money didn’t leave the market — it moved.
The damage was concentrated in a familiar place: semiconductors. The complex that led the best quarter since 2020 absorbed concentrated profit-taking on day one of Q3, with Micron tumbling 10.6%, Intel falling 9%, and neocloud names CoreWeave and Nebius plunging 13.9% and 17%, respectively. But the broader market absorbed the blow with notable composure.
Index Performance
Rates, Dollar, Commodities
Meta Enters the Cloud Wars
The session’s defining story broke via Bloomberg: Meta Platforms is building a cloud infrastructure business to sell its excess AI computing capacity to external customers, putting it in direct competition with Amazon Web Services, Microsoft Azure, Google Cloud, and the emerging neocloud players.
Meta shares surged 8.8% to $612.91 on the news, as investors recognized the potential for a new revenue stream built on infrastructure the company has already paid for. With AI-related capital expenditure projected at $65–75 billion in 2026 alone, Meta has amassed one of the largest GPU fleets in the world. Selling unused compute would directly address the market’s most persistent concern about the company: that it is spending too much on AI with too little monetization beyond advertising.
But Meta’s gain was the neocloud sector’s pain. The prospect of a Magnificent Seven company entering the cloud infrastructure market sent shockwaves through the smaller players that have built their businesses precisely in the gap between hyperscaler capacity and enterprise demand. CoreWeave dropped 13.9%, Nebius plunged 17%, and SanDisk fell 11%. The market’s read was blunt: if Meta has excess capacity to sell, perhaps the AI infrastructure buildout has overshot — at least at the margin.
Michael Burry Bets Against the AI Trade
Adding to the bearish undercurrent in semiconductors, regulatory filings revealed that Scion Asset Management’s Michael Burry — the investor immortalized in “The Big Short” — has taken short positions against several pillars of the AI trade. Burry’s targets include Nvidia, Applied Materials, Tesla, the iShares Semiconductor ETF (SOXX), and Caterpillar — a diversified bet against both the chip complex and the industrial infrastructure build enabling it.
Caterpillar, which had surged as a beneficiary of data center construction, dropped nearly 7% on the session. Tesla, however, bucked the trend — despite being among Burry’s short targets, shares rose 1.2%, buoyed by expectations for the Q2 vehicle delivery report due Thursday. Whether Burry’s thesis proves prescient or premature, the disclosure added a psychological headwind to a sector already digesting profit-taking after a 260% run in Micron and an 80%+ advance in the SOX during the first half.
ISM Prices Drop the Most Since July 2022
The economic data on Wednesday delivered a narrative the market badly wanted to hear: growth is holding while inflation is cooling.
The ISM Manufacturing PMI eased to 53.3 from 54.0 in May, marking a sixth consecutive month of expansion. New orders remained firmly above the expansion threshold at 56.0. But the standout was the prices index, which plunged 9.1 points to 73.0 from 82.1 — the largest monthly decline since July 2022. The sharp drop in input costs reflects the collapse in oil prices as the Strait of Hormuz reopens and Iranian crude reenters the market, easing the commodity inflation that had been the war’s most direct economic consequence.
Manufacturing employment improved modestly to 49.7 from 48.6, remaining in contraction but narrowing the gap. Customer inventories stayed in “too low” territory at 42.3, suggesting that restocking demand has further room to run.
Separately, the ADP private payrolls report showed 98,000 jobs added in June, below the roughly 110,000 expected and down from 122,000 in May. The soft print set up Thursday’s nonfarm payrolls report as the week’s marquee event — and potentially the data point that determines whether the Fed’s next move is a hike or a hold.
Warsh: “Inflation Risks Have Declined”
Fed Chairman Kevin Warsh, speaking at the ECB Forum in Sintra, Portugal, alongside Christine Lagarde, Andrew Bailey, and Tiff Macklem, offered his most dovish-leaning comments since taking the chair.
“Over the last four weeks, inflation expectations have come down, and inflation risks have decreased,” Warsh said. He added that “prices are too high” and reaffirmed his commitment to price stability — but notably declined to provide forward guidance on the path of rates, telling the audience that the Fed would remain strictly data-dependent.
The remarks helped anchor Treasury yields. The 10-year yield settled around 4.48% after briefly pushing higher on the ISM data. Fed funds futures priced roughly a 29% probability of a rate hike at this month’s meeting — a scenario that was near zero just weeks ago but has entered the conversation as inflation data remains sticky.
Software Stocks Rally on Guggenheim Upgrades
In a sector rotation that mirrored the broader theme of the day, software stocks advanced after Guggenheim upgraded several names and argued that fears of AI displacing enterprise software were “overblown.”
ServiceNow gained 6.6%, and the broader software complex moved higher as analysts made the case that AI would augment — not replace — existing software platforms. The upgrade cycle, Guggenheim argued, is likely to accelerate as enterprises integrate AI capabilities into their existing workflows rather than abandoning established vendors.
The software rally complemented the session’s narrative: capital rotating from hardware (semiconductors, AI infrastructure) into software and services (cloud platforms, enterprise tools, ad-tech), reflecting a market that is beginning to differentiate within the AI trade rather than treating it as a monolith.
Bottom Line
Day one of Q3 was not a sell-off — it was a sorting. Meta’s cloud ambitions rewrote the competitive map for AI infrastructure in a single session, punishing the neocloud names that had positioned themselves as the bridge between hyperscaler demand and enterprise supply. Micron and SanDisk, after tripling in Q2, absorbed the kind of profit-taking that follows any parabolic move. And the ISM’s prices index delivered the largest relief in nearly four years, providing a macro backdrop that supports risk appetite even as the Fed keeps rate hikes on the table.
The market’s internals told the real story: 32 stocks at 52-week highs versus 5 at lows, the Dow touching a record before fading, and breadth that was constructive despite the tech-heavy indices closing red. What looked like weakness in the headline was rotation underneath — and rotation, unlike distribution, is not the prelude to a bear market.
Thursday’s nonfarm payrolls report will determine whether this rotation has room to run or whether the labor market delivers a surprise that reshuffles the deck again.
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