SOX Index Falls 26% From June Peak as AI Trade Splits S&P 500

The PHLX Semiconductor Index has dropped more than 26% from its June peak, landing the SOX squarely in bear-market territory even as most S&P 500 stocks climb. The split defines the U.S. equity market right now, and strategists say the whiplash is intensifying.

On Thursday, the S&P 500 fell more than 1% — its worst day since July — yet more than 300 of its individual member stocks finished higher, according to Dow Jones Market Data. Investors have not seen such a dramatic divergence between the index and its members since January 2025.

The same session brought CNN's "Fear & Greed" index to screaming fear, while the 10-year Treasury note yield recorded its biggest daily drop since the collapse of Silicon Valley Bank. Consumer-staples names such as General Mills and Campbell's surged, but their gains could not offset losses in popular AI stocks. The PHLX Semiconductor Index fell more than 6% on Thursday alone.

What Is Driving the Split?

Mark Hackett, chief market strategist at Nationwide, said trading in 2026 has started to resemble a seesaw, with AI stocks on one side and everything else on the other.

"It's rare that we've had this many changes in leadership," Hackett told MarketWatch on Thursday.

A four-year bull market, largely fueled by optimism that AI will lift worker productivity and corporate profits, has left the S&P 500 and the tech-heavy Nasdaq Composite heavily weighted toward companies expected to benefit from the AI build-out. The 10 largest stocks in the S&P 500 now account for roughly 40% of the index's total market capitalization. Because the index is weighted by market size, the most valuable stocks exert the biggest pull on its daily direction.

The result: the average S&P 500 stock is increasingly divorced from the perceived AI beneficiaries. In plain terms, the headline index now tells you about a handful of giants, not the broader market.

How Extreme Is the Divergence?

As of Thursday's close, the equal-weighted version of the S&P 500 was on track for a weekly gain while the SOX — considered the core of the AI trade — headed for a decline. Barring a sharp shift on Friday, it would be the eighth straight week the two indexes moved in different directions, the longest such streak on record in data going back to the mid-1990s.

Jonathan Krinsky of BTIG, in commentary shared with MarketWatch on Thursday, noted the divergence between index performance and market breadth has reached extreme levels in 2026. The S&P 500 has moved opposite to most of its members on more than 30% of all trading days in 2026 — by far the most in any calendar year going back to 1996. Two out of every three trading days now feature the index and its typical member pulling in different directions.

"At some point, we believe the constant rotation stops and we see a higher-correlation selloff," Krinsky wrote.

Rotation or Retreat?

Not everyone reads the split as a warning. Farzin Azarm, a managing director of equities trading at Mizuho Americas, said investors are shuffling money from one pocket to the other rather than pulling it from the market.

"The rotation is accelerating," Azarm said. "But investors are really just moving their money around within the market."

Institutional heavyweights are accelerating the trend. Recent data from Goldman Sachs' prime brokerage desk shows hedge-fund clients have sharply reduced their gross leverage.

"The de-grossing has been significant, but that to me is actually a good sign," Azarm said.

Dan Farley, chief investment officer for U.S. Bank Asset Management Group, captured the experience of investors caught in the churn, referencing a popular carnival ride: "It's a Tilt-A-Whirl, you're getting whipped around," he said during an interview with MarketWatch.

What Comes Next?

The SOX had doubled in the span of a few months earlier this year as investors plowed money into AI "bottleneck" stocks before the reversal. That round trip explains much of the current whiplash.

History offers a caution: if the past is any guide, extreme dispersion among the S&P 500's constituents can only continue for so long. Krinsky's base case is that the rotation eventually stops and gives way to a higher-correlation selloff — a moment when the two camps stop moving in opposite directions and fall together.