On July 21 (Beijing time), all three major US stock indices closed lower. The Dow Jones Industrial Average fell 307.16 points, or 0.59%, to 51,839.26. The Nasdaq Composite slipped 0.05% to 25,508.07. The S&P 500 declined 0.19% to 7,443.28.
Beneath these seemingly mild declines lies a much sharper structural divergence. The Philadelphia Semiconductor Index (SOX) officially entered a technical bear market last week—down 20.2% from its June 22 all-time closing high, with a nearly 10% weekly drop, marking its steepest weekly loss since the market crash triggered by Trump’s tariffs in April 2025. Meanwhile, the countdown to the Federal Reserve’s July rate decision is in its final stages, and market expectations regarding a rate hike have swung dramatically in just a few weeks.
Three forces—policy uncertainty, the tech stock meltdown, and the independent trajectory of crypto assets—are converging in the same time window, creating a market landscape worthy of deep analysis.
Why the Fed’s July Rate Decision Is Full of Uncertainty
On July 28–29, 2026, the Federal Reserve will hold its Federal Open Market Committee (FOMC) meeting and announce its rate decision. This will be the second rate-setting meeting chaired by Kevin Warsh since taking office.
Market expectations for this meeting’s outcome have swung sharply over the past month. According to CME’s "FedWatch" tool as of July 21, the probability that the Fed will keep rates unchanged in July is 84.5%, while the odds of a 25-basis-point hike are just 15.5%. This probability distribution is a significant retreat from the over-40% rate hike expectation seen a week earlier.
The core driver of this shift is inflation data. Both June CPI and PPI came in cooler than expected, and declining core price indicators have removed the urgency for a July hike. Goldman Sachs Chief Economist Hazus noted in his latest report that the new inflation data has "effectively ruled out" a July rate hike, and expects rates to remain unchanged. JPMorgan strategists also stated, "underlying inflation dynamics remain tame and should allow for the Fed to be patient."
However, uncertainty remains. After three consecutive rate cuts at the end of 2025, the Fed has kept its benchmark rate in the 3.50%–3.75% range, holding steady throughout 2026. Earlier this July, Warsh stated at the ECB Forum that "prices are still too high," emphasizing that the Fed will not be satisfied with inflation above its 2% target. The June FOMC minutes reveal that, although the committee unanimously agreed to hold rates steady, internal opinions have become sharply divided, with a minority supporting a hike.
By September, the probability of keeping rates unchanged drops to 36%, while the odds of a 25-basis-point hike rise to 55.1%. This means the significance of the July meeting goes beyond the immediate decision—it’s about the forward guidance the Fed will provide, which sets the benchmark for pricing future policy paths.
Structural Risks Behind the Broad Decline in US Stocks
The July 21 decline wasn’t an isolated event. The week prior saw the S&P 500 down 1.55%, the Nasdaq down 2.9%, and the Dow Jones down 0.93%.
The immediate trigger was geopolitical risk. The US launched multiple military strikes against Iran, with Trump vowing Iran would pay for the deaths of American soldiers. International oil prices surged, with Brent crude futures closing at $89.22 per barrel, up about 20% this month. Rising oil prices intensified concerns about persistent inflation, pushing the 10-year US Treasury yield up to 4.608%.
But oil is only a surface factor. The deeper structural risk stems from the ongoing collapse of tech stocks—especially semiconductors. The SOX soared 105% from its March low to its June high, doubling in just three months. This rally was fueled by boundless optimism about AI infrastructure spending. However, the turning point came at TSMC’s Q2 earnings call on July 16. Despite quarterly revenue hitting $402 billion and net profit up over 77% year-on-year, TSMC sharply raised its full-year capex guidance, and the market responded negatively: TSMC’s US ADR closed down 2.3%, and SOX plunged 4.3% in a single day.
The market’s concern is straightforward: When industry leaders need such aggressive capital spending to maintain AI chip supply, investors begin to question when these investments will translate into meaningful profits. Goldman Sachs’ Head of Asset Allocation Research described this sell-off as "one of the largest momentum strategy unwinds on record." The main driver isn’t deteriorating fundamentals, but large-scale unwinding by hedge funds and mutual funds of the year’s hottest pair trade: "long semiconductors, short hyperscale cloud providers."
Darrell Cronk, President of Wells Fargo Investment Institute, commented, "Semiconductor and AI trades are undergoing a healthy reality check. Recent technical deterioration increases the risk of a deeper pullback toward long-term support levels."
What Does It Mean for the SOX to Enter a Technical Bear Market?
The definition of a technical bear market is mechanical—a 20% drop from recent highs. But the SOX entering a bear market carries significance far beyond the definition.
First, it marks a systemic shake-up of the global risk asset sentiment anchor. SOX doubled in three months, making it one of the strongest asset classes globally in the first half of 2026. When the "most crowded trade" starts to unravel, its shockwaves ripple through multiple channels to other risk assets.
Second, capital outflows from leveraged ETFs create a self-reinforcing negative feedback loop. According to Kobeissi Letter, assets under management in leveraged semiconductor ETFs fell from a June peak of about $163 billion to $100 billion, a drop of $63 billion or 39%. Semiconductor ETFs account for 63% of all leveraged ETF outflows in the US. When leveraged ETFs face large-scale redemptions, fund managers must sell underlying assets to meet liquidity needs, further depressing chip stock prices.
Third, SOX valuations remain historically high. The SOX P/E ratio has dropped to 39.27, and the Nasdaq’s to 39.1—both still near the critical 40 mark. SOX’s forward P/E is about 26, well above the 10-year average of 19. This suggests that even after a sharp correction, the contraction in valuations may not be over.
Are Bitcoin and US Stocks Decoupling or Reconnecting?
The correlation between Bitcoin and the Nasdaq is experiencing wild swings, making it one of the most important variables to watch right now.
In April 2026, the 30-day rolling correlation between Bitcoin and the Nasdaq hit a record high of 0.96—almost perfect statistical synchronization. At that time, Bitcoin essentially functioned as a magnified tech stock risk exposure. By early June, this coefficient had dropped to nearly zero. Bitcoin’s 30-day correlation with the S&P 500 fell from nearly 0.8 in early May to about 0.5.
This dramatic shift from highly correlated to nearly decoupled happened in less than two months. On June 5, the crypto market’s total capitalization dropped 8.7% in a week to $2.29 trillion, while the Dow and S&P 500 both hit all-time closing highs. Crypto assets didn’t rise with US stocks—breaking the multi-year pattern of "rising and falling together."
In July, this divergence continues. On July 21, Bitcoin climbed back above $65,000, trading around $65,317 (+0.88%), while all three major US indices closed lower. The Fear & Greed Index remains in the "extreme fear" zone at 25, yet the crypto market is showing price resilience distinct from US stocks.
Charles Schwab’s digital asset research team noted that US equities keep hitting new highs on the AI tech wave, while Bitcoin is down nearly 50% from its October all-time high. The "stock-crypto decoupling" phenomenon is drawing widespread attention. Some analysts point out that Bitcoin’s 30-day correlation with the S&P 500 is now around 0.6–0.7, in a "fall together, rise separately" state—crypto assets often follow US stocks in sharp declines, but don’t necessarily rally when US stocks slowly climb to new highs.
How Triple Divergence Is Reshaping Crypto Asset Pricing Logic
The current market is exhibiting at least three layers of divergence:
First divergence: Between policy expectations and market pricing. The probability of a July rate hike plunged from over 40% to 15.5%, while September hike expectations rose to 55.1%. This "no move this month, move next month" expectation structure signals a lack of certainty about the inflation path.
Second divergence: Structural divergence within traditional assets. The S&P 500 fell just 0.19%, but the semiconductor sector entered a technical bear market. Mild index-level moves hide intense sector-level adjustments. Capital is rotating out of overvalued semiconductor and memory stocks into sectors like finance, retail, and transportation that benefit more directly from economic resilience.
Third divergence: Between Bitcoin and US stocks. Bitcoin was highly synchronized with the Nasdaq in April 2026 (correlation coefficient 0.96), but is now seeking an independent trajectory. Multiple factors drive this divergence: AI narratives channel capital into tech stocks instead of Bitcoin; Bitcoin’s unique supply pressures (miner holdings, long-term holder behavior) are at play; and structural changes in the crypto market—such as the introduction of spot ETFs—are fundamentally altering demand, shifting market drivers from supply-side to demand-side.
Deutsche Bank’s June 2026 report stated that Bitcoin is "increasingly behaving as an institutional risk asset, rather than a retail-driven speculative bet." This suggests Bitcoin’s pricing logic is shifting from "retail narrative-driven" to "macro factor-driven"—with macro factors being the most uncertain variables at present.
How Super Earnings Week and Geopolitical Risks Will Shape Market Direction
In the coming week, markets face three simultaneous tests.
First: Tech giant earnings. Alphabet (Google’s parent) kicks off earnings on July 22, followed by Microsoft, Amazon, Meta, and others. The market urgently needs clear signals to confirm that tech giants’ AI investment returns are sustainable. These reports will directly determine whether the semiconductor sector can stabilize—if the giants confirm ongoing large-scale AI infrastructure investment, chip stocks may find support; if they signal slowing capex, SOX’s bear market could deepen.
Second: Geopolitical risk. The US-Iran conflict continues, and oil prices have surged about 20%. Persistent oil price gains will reignite inflation fears, impacting the Fed’s policy path. On July 30, the FOMC rate decision, core PCE, and US Q2 GDP annualized rate will all be released—these three data points will profoundly influence market assessments of inflation and economic outlook.
Third: Structural evolution within crypto assets. On July 7, SpaceX officially joined the Nasdaq 100 Index, holding 18,712 Bitcoins on its balance sheet. The number of Nasdaq 100 companies with Bitcoin treasury holdings has grown to three (SpaceX, Tesla, and Strategy). Index inclusion creates demand driven by rules, not discretionary allocation. This structural change could alter the long-term correlation pattern between Bitcoin and US stocks.
Summary
Ahead of the Fed’s July rate decision, the market is undergoing a multi-layered repricing. The S&P 500’s mild decline masks a deep bear market in semiconductors, while the swing in Bitcoin-US stock correlation from 0.96 to nearly zero reveals crypto assets transitioning from "tech stock amplifier" to an independent asset class.
Triple divergence—between policy expectations and market pricing, within traditional assets, and between Bitcoin and US stocks—defines the current market’s core features. The ultimate direction of these divergences will be tested in the coming week: tech giant earnings will gauge the sustainability of the AI narrative, the Fed’s decision will clarify the rate path, and whether crypto assets can chart an independent course amid macro uncertainty will determine their ultimate asset classification.
For market participants, instead of trying to predict the trajectory of a single variable, it’s more valuable to examine the interplay among them—when policy, geopolitics, technology, and capital flows converge in the same time window, real risks and opportunities often hide in the gaps created by divergence.
FAQ
Q1: Will the Fed raise rates in July?
According to CME "FedWatch" data on July 21, the probability that the Fed will keep rates unchanged in July is 84.5%, while the odds of a 25-basis-point hike are 15.5%. Most investment banks believe the latest inflation data has essentially ruled out a July hike. However, September hike expectations have climbed to 55.1%, and there is still significant disagreement about the future policy path.
Q2: Why did the Philadelphia Semiconductor Index enter a technical bear market?
SOX has dropped 20.2% from its June 22 all-time high, driven mainly by: rising concerns about the sustainability of AI capital spending; large-scale unwinding of the "long semiconductors, short hyperscale cloud providers" pair trade by hedge funds and mutual funds; and negative feedback loops from massive outflows in leveraged semiconductor ETFs.
Q3: Has Bitcoin really decoupled from US stocks?
The 30-day rolling correlation between Bitcoin and the Nasdaq has fallen from a peak of 0.96 in April 2026 to nearly zero. Currently, the two are in a "fall together, rise separately" state—crypto assets often follow US stocks in sharp declines, but don’t necessarily rally when US stocks rise. Institutions like Charles Schwab have defined this phenomenon as "stock-crypto decoupling."
Q4: How does the semiconductor bear market affect crypto assets?
The semiconductor bear market impacts the crypto market through multiple channels: massive outflows from leveraged ETFs drain market liquidity; cooling AI narratives directly affect the valuations of AI-related crypto projects; and a general contraction in risk appetite puts pressure on crypto assets as high-beta allocations. However, Bitcoin’s recent price resilience also suggests crypto assets are trying to establish an independent pricing logic apart from traditional tech stocks.
Q5: What key events should be watched in the coming week?
July 22 marks the start of Super Earnings Week with Alphabet’s report; July 28–29 brings the FOMC rate decision; July 30 sees the simultaneous release of core PCE and US Q2 GDP annualized rate. These three events will jointly set the short-term benchmarks for market pricing of inflation, rates, and economic growth.
