Software stocks lead S&P 500 rotation as oil plunge reshuffles sectors

A rotation from semiconductors into software stocks reshuffled the S&P 500 on Monday as a U.S.-Iran ceasefire sent oil prices tumbling and Chinese chip competition rattled the sector.

The S&P 500 slipped 0.16% to 7,404.10 as a software-led rally in megacap tech was overwhelmed by a broad semiconductor selloff triggered by Chinese chipmaking advances.

"The market is rotating toward quality as the business cycle matures, with AI adoption driving margin expansion for hyperscalers and software companies while semiconductor names face valuation pressure," said Mike Wilson, chief equity strategist at Morgan Stanley.

The Dow Jones Industrial Average added 0.38% to 52,133.60, supported by gains in Microsoft and Apple, while the Nasdaq Composite fell 0.79% to 27,948.20 as chip stocks dragged the tech-heavy index lower. Workday surged 8.97%, CoStar Group gained 7.09%, and Salesforce rose alongside them, leading the S&P 500's gainers. On the losing side, AMD dropped 7.53%, ASML lost more than 7%, and Micron Technology shed nearly 6%, with the VanEck Semiconductor ETF falling more than 3%.

The rotation carries implications for portfolio positioning heading into a pivotal week. The Federal Reserve announces its rate decision Wednesday, followed by earnings from Microsoft, Meta, Apple, and Amazon — results that will test whether software and cloud companies can justify their premium valuations over semiconductor names.

The catalyst for Monday's divergence was twofold. Oil prices plunged after the U.S. and Iran agreed to pause military strikes while diplomatic talks resume, with Brent crude falling about 6% to around $86.40 a barrel and West Texas Intermediate dropping 6.1% to $83.83. Lower fuel costs boosted airlines and cruise operators while pressuring energy stocks, but the broader market impact was overshadowed by developments in China's semiconductor industry.

ChangXin Memory Technologies went public in Shanghai and became China's most valuable listed company with a valuation near $490 billion. Separately, a Shanghai firm began mass-producing deep ultraviolet lithography machines — equipment that ASML has held a near-monopoly on for years. The news triggered a reassessment of semiconductor valuations across the board, with traders questioning whether lofty multiples in the chip sector remain justified as competition intensifies.

Software Surges as Semis Sink

The divergence between software and semiconductors was the widest in months. Microsoft rose 3.13%, Alphabet added 2.8%, and Apple gained 1.3%, providing a counterweight to the chip selloff. Morgan Stanley's Wilson argued that margin expansion will increasingly depend on AI adoption rather than early-cycle operating leverage, favoring companies that can demonstrate measurable returns from AI investments over hardware suppliers.

Treasury yields edged lower as the oil-driven decline in inflation expectations supported bets that the Federal Reserve may soften its stance. The Cboe Volatility Index held near elevated levels as traders positioned for the week's packed event calendar, which includes the Fed's rate decision Wednesday and earnings from four of the five largest U.S. companies by market capitalization.

This article is for informational purposes only and does not constitute investment advice.