Wall Street's hottest trade is starting to wobble at the end of a holiday-shortened week, with tech stocks sliding deeper into the red and investors starting to accelerate their broad rotation into other market sectors at the start of the third quarter.

Tech stocks in Asia were hit hard overnight, with South Korea's highflying KOSPI falling nearly 8%, paced by big declines for chip makers SK Hynix and Samsung, and Japan's Nikkei 225 tumbling nearly 2.5%.

That followed a 6.3% slide for the PHLX Semiconductor Index Wednesday, which is now edging toward correction territory, following Meta Platforms' reported plans to sell excess AI computing power.

That has raised big concerns tied to overcapacity in the market's most-important sector, while a report suggesting Apple is looking to China-based chip makers to supply devices sold in the world's second-largest economy has added pressure on the pricing metrics of U.S.-based firms.

Broader market developments, including a record high for the equal-weighted S&P 500, the lowest crude prices since the U.S. war with Iran began in February, and a pullback in the dollar are likely to provide some support on Thursday as investors parse June payroll data and assess the underlying strength of the U.S. economy.

But the chips sector and wider tech market is starting to feel a bit rocky heading into the start of the second-quarter earnings season, and bond investors are pricing in Federal Reserve rate hikes under new Chairman Kevin Warsh.

That has left sectors such as healthcare, industrials, and financials to pick up recent gains as investors shift focus away from the tech-paced advances that defined the first half of the year.

Whether this is a rebalancing effort to start the new quarter or a shift in the tech investment paradigm will likely be the summer's most important debate.

  • Martin Baccardax

Get more of the journalism you love. Choose Barron's as a preferred source in Google.

The U.S. Sets Up New Trade Limbo With Canada, Mexico

The U.S. trade pact with Mexico and Canada lives, but the U.S. Trade Representative didn't renew it in its current form after a virtual meeting with trade officials. Instead, annual reviews of the deal will set up a new form of trade limbo for America's biggest trading relationship.

  • The USMCA, struck during the first Trump administration, wasn't renewed because it didn't control the trade deficit, a senior administration official says, adding it also didn't deliver on market access issues, especially related to corn or energy. Analysts expected the U.S. to pick a middle ground rather than withdraw.
  • The pact governs roughly $1.6 trillion in trade between the neighbors and underpins critical supply chains. President Donald Trump has for months voiced a preference for bilateral deals, and held discussions with Mexico, with another planned for July 20. Relations have been more fraught with Canada.
  • Trump's tariffs and trade policies have "already subsumed USMCA," the administration official said, but the U.S. Trade Representative plans to continue negotiating with both countries. The official added that there could be an agreement reached within Trump's current term.
  • The U.S. would like to see tighter rules of origin, not just in autos but for broader industrials -- increasing the amount of content coming from the U.S. or its partners to get USMCA tariff treatment. The Canadians and Mexicans are seeking a reduction in sectoral tariffs.

What's Next: Some of the issues the U.S. Trade Representative has outlined to Congress are trilateral — related to autos, aluminum, steel, and rules of origin — there are also specific issues with each country like dairy and digital issues with Canada and investment-related concerns with Mexico.

  • Reshma Kapadia

SpaceX Emerges as Threat to Big Three Wireless Providers

Big Three telecoms have swooned about Elon Musk's SpaceX disrupting the wireless sector. The mere possibility wiped out $18 billion in market value for Verizon, AT&T, and T-Mobile stocks this week after a report that Charter Communications was in talks with the space and satellite company.

  • Charter is talking about a possible consumer mobile phone with SpaceX, according to a Bloomberg report. Charter declined to comment to Barron's and SpaceX didn't respond to multiple requests for comment. BNP Paribas analysts believe the telco sector will be pressured until some clarity emerges.
  • The BNP Paribas analysts point to the result of the Federal Communications Commission's 2027 auction of mid-band wireless spectrum, known as the Upper C-Band. That auction, which will take place no later than July 2027, aims to significantly increase the amount of wireless spectrum in the U.S.
  • The second is if, or when, SpaceX and T-Mobile renew their current direct-to-cell satellite deal, which allows T-Mobile users to connect to SpaceX's Starlink service with their smartphones -- or if SpaceX instead signs a similar deal with Verizon or AT&T, according to BNP Paribas.
  • If SpaceX signs with Verizon or AT&T, such a move could potentially "be a sign of détente in tensions" between Musk and the big three carriers, the analysts said. There are still many unknowns around how the SpaceX war with the cellular service providers will turn out.

What's Next: Wall Street is beginning to broadly believe that Starlink could take market share from Comcast and Charter, the two leading cable internet providers, and AT&T and Verizon Communication, which are the largest internet services through fiber.

  • Kit Norton

Kroger Wades Back Into M&A With Smaller Regional Deal

Kroger is trying again to expand by acquisitions but with a far smaller target: privately held Giant Eagle for $1.65 billion. With roughly 200 supermarkets and approximately $9 billion in annual sales, Giant Eagle is large enough to strengthen Kroger's regional position but small enough to avoid competition concerns.

  • The deal would expand the Ohio-based Kroger in Pennsylvania, Ohio, West Virginia, Maryland, and Indiana. The companies said they expect limited store divestitures to obtain regulatory clearance, a sharp contrast with Kroger's ill-fated $25 billion deal for Albertsons. A federal judge blocked that megadeal in 2024.
  • Kroger faces growing competition from discount chains, warehouse clubs, and e-commerce giants like Walmart and Costco Wholesale. Scale has been a competitive advantage, since more purchasing power can help lower costs, strengthen negotiating leverage with suppliers, and support investments in technology and fulfillment.
  • After the Albertsons setback, Kroger executives may conclude that pursuing several smaller, strategically targeted deals offers a faster and less risky path than spending years fighting regulators over a large merger. It's returning to a strategy of buying regional operators with loyal customer bases and expanding into adjacent markets.
  • Guggenheim analyst John Heinbockel thinks the $1.65 billion price tag for Giant Eagle is very attractive. Based on his estimate of Giant Eagle's earnings, Kroger is paying a low multiple. The analyst says Kroger can improve Giant Eagle by adding stronger pricing and better e-commerce.

What's Next: In some markets, Giant Eagle is nearly neck-and-neck with Walmart, the analyst noted. Kroger can cut costs by combining operations, sourcing, technology, and overhead. Heinbockel says savings could reach $50 million to $100 million over three to five years, and the deal could start boosting Kroger's earnings by fiscal 2028.

  • Evie Liu

Tech Stocks Look Ready to Outpace Energy in Second Half

Technology was the market's darling in the second quarter, helping the S&P 500 generate a nearly 10% return through the first half of the year. The next stretch is looking tougher. Tech will still be prominent but there may be better values and sector performance elsewhere.

  • Fueled by AI enthusiasm and momentum in memory-chip stocks like Micron Technology, the technology sector surged a record 43% in the second-quarter, according to Dow Jones Market Data, finishing the first six months up 32%. Energy and industrials tied for second place, gaining around 20% each in the first half.
  • There's precedent for tech to keep rallying. The sector rose 11.7% in the third quarter of 2020 following a 30% second-quarter surge when a bear market ended, but cracks are emerging. The latest memory-chip rally didn't extend to Nvidia and Broadcom, both up less than 7% this year.
  • Meta Platforms, despite a 10% bump on Wednesday, is still down 6% through the first six months, and Apple has been a laggard. Tech always carries an elevated multiple, but after such a big run the sector is looking more vulnerable to a pullback.
  • Analysts have been boosting estimates for the second half with tech expected to deliver 58% earnings growth in the third quarter and 48% in the fourth, according to consensus forecasts. Those figures would be better than every other sector except for energy.

What's Next: Overall, earnings for the S&P 500 are expected to rise 27% in the third quarter and 24.6% in the fourth quarter. Tech's next big test is the coming earnings reporting season.

  • Paul R. La Monica
  • Newsletter edited by Liz Moyer, Patrick O'Donnell, Rupert Steiner

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.