Why Did the Three Major US Stock Indices Fall? Challenging Your Investment Common Sense

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The three major US stock indices fluctuated during the session before closing lower collectively. The market did not experience a sharp broad sell-off; instead, it showed clear signs of wait-and-see sentiment. The primary reason for this decline was not a single major negative factor. It stemmed from cautious sentiment ahead of the Federal Reserve’s interest rate meeting, a phenomenon that challenges the simplistic notion that “market declines” equate to “bad news.”

Key Takeaways

• The US stock decline reflects investors’ caution ahead of the Fed meeting.
• Tech stocks are no longer a monolith; AI hardware stocks performed strongly, while software stocks faced challenges.
• During market declines, investors should seek companies with stable demand and strong fundamentals.

Why Did the Three Major US Stock Indices Close Lower?

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Although the three major US stock indices rose in early trading, they ultimately failed to hold onto gains and closed lower collectively. The Dow Jones Industrial Average fell about 0.45%, the S&P 500 dropped 0.35%, and the tech-heavy Nasdaq Composite had the smallest decline, at approximately 0.14%. This drop was not driven by panic selling but rather a carefully orchestrated “pause.”

Core Driver: Market Caution Ahead of the Interest Rate Meeting

The primary reason for the market decline was widespread investor caution ahead of the Federal Reserve’s interest rate meeting. When major economic decisions remain pending, capital often chooses to avoid risks rather than aggressively enter the market. This led to the three major US stock indices giving back their early gains.

Currently, the market has clear expectations for the Federal Reserve’s interest rate path.

Market observers widely expect the Fed to conduct its final rate cut this week. According to data from the CME FedWatch tool, the market sees an 87% probability of a 25 basis point rate cut in December. Looking ahead, JPMorgan’s global research team anticipates two more rate cuts in 2025 and one in 2026.

In this context, investor focus has shifted from “whether there will be a rate cut” to the future policy signals revealed by the Fed Chair in the post-meeting statement. Any wording that deviates from expectations could trigger sharp market volatility. Therefore, maintaining caution until clear signals emerge has become the consensus.

Inside View: Divergence in Tech Stock Performance

Beneath the overall indices, internal market divergence was particularly pronounced, especially in the technology sector. The once-uniform “Magnificent Seven” tech giants now show varied performance.

For example, Apple (AAPL) reached an all-time high last week, but experienced a slight pullback after the opening this week, indicating some profit-taking. Amazon (AMZN) underwent a deep correction after hitting a record in early November and is currently in a consolidation phase.

Software and service-oriented tech companies faced more evident pressure. Microsoft (MSFT) saw its largest intraday drop since November 18. Reports indicated that due to enterprise customers’ hesitation to pay premiums for early-stage technology, Microsoft lowered its sales growth expectations for its latest AI tools.

• In the previous fiscal year, one of Microsoft’s Azure cloud sales teams was required to increase customer spending on a certain AI product by 50%.
• However, fewer than 20% of the salespeople achieved this goal.
• As a result, Microsoft reduced its growth target for the current fiscal year to about 25% to better align with actual customer demand.

This news dampened investor optimism about rapid AI revenue growth and clearly highlighted the temperature difference between software services and hardware infrastructure.

Highlight Analysis: Why the Semiconductor Index Hit a New High Against the Trend

In sharp contrast to the weakness in software stocks, the semiconductor industry stood out positively. The Philadelphia Semiconductor Index (SOX) rose against the trend, with the iShares PHLX SOX Semiconductor ETF (SOXX) gaining 1.09% on the day and reaching a new all-time high.

This rise was no accident; it was driven by strong demand for artificial intelligence (AI). AI training and inference systems require powerful hardware support, directly fueling demand for high-end chips and memory chips.

These companies collectively contributed over 65% of the Philadelphia Semiconductor Index’s gains this year. Positive industry news continues to emerge, further bolstering investor confidence. For instance, the market expects the AI chip market to exceed $125 billion in 2025. Meanwhile, Microsoft is discussing collaboration with Broadcom on custom AI chip design to reduce reliance on NVIDIA, potentially positioning Broadcom as another key player in the AI infrastructure market.

This performance clearly demonstrates that even amid overall adjustments in the three major US stock indices, structurally driven opportunities supported by fundamentals still exist.

Which Investment Common Sense Is Being Challenged by Market Divergence?

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The current market performance is more than just numbers rising and falling; it serves as a vivid textbook challenging some deeply entrenched “common sense” in investors’ minds. When the three major US stock indices pull back in unison, many instinctively assume risk is everywhere. However, a closer look inside the market reveals a completely different story.

Challenging Common Sense One: Tech Stocks Are No Longer a Monolith

For a long time, investors were accustomed to treating “tech stocks” as a single entity. Buying tech stocks seemed equivalent to investing in the future—a simple and effective strategy. However, recent market trends clearly indicate that this common sense is outdated.

A profound transformation is unfolding within the tech sector. Investors are no longer broadly chasing all “tech”-related concepts but are beginning to carefully differentiate.

• AI Hardware (e.g., Semiconductors): These companies provide the most basic “picks and shovels” of the AI era. Their demand is real and urgent. Whether training large language models or building data centers, powerful chips are indispensable. Thus, their growth has a high degree of certainty.
• AI Software and Services: These companies offer AI-based applications and solutions. Their business models are more like selling “treasure maps.” While the prospects are vast, uncertainty remains about whether enterprise customers are willing to pay premium prices for these emerging services. Microsoft’s downward revision of AI tool sales expectations exemplifies this uncertainty.

The market is shifting from chasing vague “tech stories” to embracing clear “product demand.” Investors are now asking a more specific question: What problem does your technology solve immediately, and does it generate revenue? This shift means that the investment approach of lumping all tech companies together carries increasing risk.

Challenging Common Sense Two: Seeking Structural Opportunities in Declines

Another challenged common sense is that when indices fall, investors should step aside and wait. While caution is necessary, blanket pessimism may cause investors to miss good opportunities. The current market environment precisely illustrates that overall index adjustments can mask strong momentum in certain areas. Smart money is shifting from chasing high-risk “growth stories” to seeking more “certain” high-quality assets.

Reports from multiple investment institutions confirm this trend. For example, JPMorgan noted in its long-term outlook that the market composition has shifted toward higher-quality, faster-growing companies. Calvert’s report emphasizes the importance of investing in high-quality companies through historical data.

Historical data shows that quality is crucial. Over the past 35 years, high-quality companies’ stocks have far outperformed low-quality ones. If $10,000 were invested in the S&P Quality Stocks Index, it would grow to $3,006,341. In contrast, the same amount invested in a low-quality stocks index would only reach $1,044,981.

So, in the current environment, which areas offer this “certainty”? Besides the AI-driven semiconductor industry, some traditional defensive sectors also exhibit unique appeal. These industries provide products or services essential to societal functioning, with relatively stable demand less affected by economic cycles.

• Healthcare: Regardless of economic conditions, demand for medicines and medical services persists.
• Consumer Staples: Food, household items, and personal care products are rigid expenditures for every household.
• Utilities: Essential services like electricity, water, and natural gas are indispensable to modern life, with highly stable demand and cash flows.

Therefore, when the market adjusts overall, the investor’s task is not to predict “up or down” but to identify “who is rising, who is falling, and why.” In an era where macroeconomic uncertainty is the norm, seeking companies with stable demand, strong moats, and healthy cash flows is far more valuable than predicting short-term index fluctuations.

This decline primarily reflects caution ahead of macroeconomic decisions rather than deterioration in fundamentals. Although Federal Open Market Committee (FOMC) members disagree on future rates, economists believe the probability of recession has decreased. This reminds investors that understanding internal market structure is more important than fixating on index movements and that they should focus on uncovering structurally driven opportunities backed by fundamentals.

Frequently Asked Questions

Does this decline mean a market crash?

No. This decline mainly reflects investors’ cautious attitude ahead of major decisions. It is not panic selling caused by deteriorating fundamentals.

Aren’t all tech stocks the same? Why do some rise while others fall?

Tech stocks have diverged. The market favors AI hardware (like chips) with clear demand over software services with uncertain business models.

When the market falls, do all stocks decline?

No. Even if indices fall, some sectors may rise due to strong fundamentals and stable demand, such as semiconductors or healthcare.