By Lisa Pauline Mattackal and Ankika Biswas
(Reuters) -Wall Street's major indexes reversed early gains on Thursday after a brief rebound in chip and megacap stocks fizzled out, as investors rotated out of high-priced tech stocks and into underperforming sectors.
U.S.-listed shares of Taiwan Semiconductor Manufacturing fell 2.8%, dragging the Philadelphia SE Semiconductor index down 0.6% and putting it on track for a second consecutive session of declines after a steep sell-off in both chips and megacap technology shares on Wednesday.
Semiconductor and megacap stocks initially looked to recoup losses after TSMC raised its full-year revenue forecast, but reversed course as investors continued to move out of heavily weighted megacap growth stocks into small caps.
"We had a snapback rally because of TSMC this morning, but the tech trade is crowded. Everybody who's overweight (on) tech stocks was using the opportunity to lighten up, and then they all (tech stocks) started going red," said Dennis Dick, trader at Triple D Trading.
Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) reversed earlier gains, falling between 1.7% and 2.9%.
The small-cap Russell 2000 also pulled back 0.7%, set for a second session of declines after a five-day rally.
"It was a little too much, too fast for the Russell. Nothing goes straight up, but it's all about rotation," Dick said, adding that small caps will continue to perform well in the coming weeks as investors anticipate monetary policy easing.
Elsewhere, the Labor Department reported jobless claims rose to 243,000 for the week ended July 13 - higher than previously forecast - another signal that the jobs market was cooling.
Traders slightly raised bets on a 25-basis-point rate cut from the Federal Reserve by September to over 95%, according to CME's FedWatch, despite much stronger than expected manufacturing data from the Federal Reserve Bank of Philadelphia.
Investors also assessed corporate earnings, with Domino's Pizza slumping 12.8% after falling short of estimates for quarterly same-store sales.
Homebuilder D.R. Horton jumped 11% to an all-time high after reporting higher quarterly profit and a $4-billion share buyback plan. The move also lifted the PHLX Housing index to a record high.
Chipmakers Nvidia and Intel (NASDAQ:INTC) bucked sectoral declines, gaining 0.9% and 4.2%, respectively.
The S&P 500 Energy index led sectoral gains, while the Healthcare index was dragged by a 7.2% loss in Eli Lilly (NYSE:LLY).
Comments from Fed officials Lorie Logan, Mary Daly and Michelle Bowman are also expected later in the day.
At 12:08 a.m. ET, the Dow Jones Industrial Average was down 257.34 points, or 0.62%, at 40,940.74, the S&P 500 was down 37.93 points, or 0.68%, at 5,550.34, and the Nasdaq Composite was down 184.34 points, or 1.02%, at 17,812.59.
Warner Bros Discovery jumped 6.3% after a report that the CNN and HBO owner had discussed a plan to split its digital streaming and studio businesses from its legacy TV networks.
Netflix (NASDAQ:NFLX) slipped 1.1% ahead of its results, due after markets close.
Declining issues outnumbered advancers for a 1.44-to-1 ratio on the NYSE, and for a 1.98-to-1 ratio on the Nasdaq.
The S&P index recorded 76 new 52-week highs and one new low, while the Nasdaq recorded 152 new highs and 30 new lows.