Nasdaq, S&P 500 end sharply lower, hit by chips, megacaps; Dow extends rally

Stocks tumble on chip sector sell-off amid U.S.-China trade tensions, Nasdaq down 2.8%, S&P 500 down 1.4%.

The S&P 500 and the Nasdaq tumbled on Wednesday as plunging microchip shares, in the face of potential escalation of U.S. trade conflicts with China, exacerbated the ongoing rotation out of megacap tech-related stocks.

A report that the Biden administration is considering severe trade restrictions against China sent microchip stocks down 6.8%, marking the Philadelphia SE Semiconductor index's biggest one-day drop since March 2020.

A pullback in the "Magnificent 7" group of momentum stocks, led by Nvidia and Apple, dragged the Nasdaq 2.8% lower, while the benchmark S&P 500 slid 1.4%.

The Dow Jones Industrial Average, which has until recent days underperformed the other two indexes this year, held onto a modest gain and logged its third straight record closing high.

The blue-chip average got a boost from Johnson & Johnson , UnitedHealth Group and, in defiance of the swooning chip sector, Intel Corp.

"(The sell-off) is being driven by pressure in the chip area, and the first time, we're actually seeing it extend into small caps," said Michael Green, chief strategist at Simplify Asset Management in Philadelphia.

"The U.S. is increasingly talking about cracking down (on China), which has exacerbated the unwind that had already started," Green added. "Many of the areas (of the equities market) that had been neglected are experiencing discriminatory buying."