Barron:The Unanswered Questions Driving the Stock Market Dro

The biggest problems arent caused by what you dont know, but what, as Mark Twain put it, you know for sure that just aint so. And thats a massive problem for the stock market right now.

The market sure is doubting what it knows right now. Its there in the major indexes, where the SP 500 finished the week down 1.6%, while the Nasdaq Composite fell 2.9%. The more tightly focused Nasdaq-100, down 2.7% for the week, is on track for its worst July performance in more than two decades.

Everything we thought we knew is coming undone. Chip stocks were supposed to be unstoppable, driven by shortages and insatiable demand for artificial intelligence. Now, the PHLX Semiconductor index is down 20% from its June 22 peak, slumping into bear market territory on Friday.

That pain has bled into highflying indexes in Asia, which have experienced their own brutal declines, lopping more than 25% from South Koreas Kospi index and dragging Japans Nikkei 225 into correction territory with Fridays 4% slump.

The more worrying aspect of the selloff, however, might be tied to the fact that it doesnt really have a catalyst.

Sure, we can point to a host of issues, including worries about the pace of first-half gains for the chip sector, the renewed levels of Big Tech companies borrowing to fund their massive capital spending plans, and an economic backdrop that still feels uncertain as it adjusts to a new regime at the Federal Reserve.

That helps explain the rotation were seeing in broader markets, with healthcare, financials, energy, and utilities pacing gains over the past month, helping the Dow Jones Industrial Average-which finished the week down nearly 1%hold up far better than its tech-heavy peers, while an equal-weighted index of SP 500 stocks hit a fresh all-time high on Thursday.

The stock market, however, can take only so much weakness in its biggest, hottest stocks before succumbing.

Jonathan Krinsky, BTIGs chief market technician, is concerned about a sharp summer slump, similar to the pullback seen in 2024, that could drive the SP 500 below its 200-day moving average of 6983 points. The benchmark is only around 7.3% north of that base on Thursdays close.

For this to occur, semis would remain weak and go lower, while some of the recent broadening trades, as well as the Mag7, stall out and reverse lower, he warns.

Markets seem to be moving quietly in that direction, even if the headlines moving markets dont appear all thattreacherous. The launch of China-based start-upMoonshot AIs Kimi K3 model, which the company says can rival those from OpenAI and Anthropic, has echoes of the DeepSeek selloff in the winter of 2025. Those models, however, remain largely untested and curiously timed with President Xi Jinpings first visit to an AI summit in Shanghai.

Alphabets GOOGL 2.17%... recent slump, tied to a Bloomberg report on delays to the launch of its newest AI model, probably wont influence its second-quarter earnings, due next week, nor the outsize gains the tech sector is likely to contribute to SP 500 profits over the three months ended in June.

That leaves stock markets in a key period of reflection.

Does the AI trade, and all the tailwinds it creates, carry further into the year and take stock prices higher? Or does its reprice lower, due to the lack of real-word adoption of the new technology?

Investors still havent decided, but theyll need to make up their minds soon. Because if they dont, the market will for them.