By Chuck Mikolajczak

NEW YORK (Reuters) – The S&P 500 and Nasdaq closed lower on Tuesday, weighed down by weak chip and megacap shares ahead of earnings from heavyweight tech companies this week, but the Dow managed modest gains.

Microsoft <MSFT.O>, seen by many as leading the artificial intelligence race, fell 0.89% to $422.92 ahead of its quarterly results. After the closing bell, the software maker dropped about 5% after reporting results that missed expectations for quarterly growth in its Azure cloud-computing service.

Chipmaker Nvidia, regarded as a prime beneficiary of potential AI growth and the year’s second best S&P 500 performer, tumbled 7.04% to $103.73, weighing on other chip stocks to pull the Philadelphia semiconductor index down 3.88%.

Other megacap names such as Apple , Amazon.com and Meta Platforms , are all due to report earnings this week. Apple edged up 0.26% to $218.80, but Amazon slipped 0.81% to $181.71 and Meta shed 0.54% to $463.19 on valuation concerns.

“A lot of people are looking at artificial intelligence now and saying this is all great but I how do I make money on it,” said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco.

“Financially the companies are probably doing quite well, but the question is what are you paying for this? These are not cheap stocks and so you need to go into these things with your eyes open.”

The Dow Jones Industrial Average rose 203.40 points, or 0.5%, to 40,743.33, the S&P 500 lost 27.10 points, or 0.5%, to 5,436.44 and the Nasdaq Composite lost 222.78 points, or 1.28%, to 17,147.42.

The small cap Russell 2000 gained 0.35% and the S&P value 500 index advanced 0.52%, buoyed by financials , which jumped 1.19% to outperform the broader market. This extended a recent rotation out of more expensive stocks as the market has solidified expectations the Federal Reserve will cut rates this year on signs of moderating inflation.

Energy, up 1.54%, and financials were the best performing of the 11 major S&P sectors while technology, down 2.2%, was the weakest.

Megacap stocks fell last week on Tesla’s disappointing results and Alphabet’s higher expenditure forecast, prompting a broad-based market sell-off.

The market is betting on a slight chance that the Fed will cut rates by at least 25 basis points at the end of its policymaking meeting on Wednesday, but it is completely pricing in a cut for the U.S. central bank’s September meeting, CME’s FedWatch Tool showed.

Several labor data releases are scheduled for this week, culminating in Friday’s government payrolls report. On Tuesday, a Job Openings and Labor Turnover Survey pointed to 8.18 million job openings in June, compared to economists’ expectation of 8 million.

Among single stocks, Procter & Gamble lost 4.84% at $161.70 after missing fourth-quarter sales expectations.

Merck plunged 9.81% to $115.25 after the drugmaker cut its annual profit forecast. CrowdStrike dropped 9.72% to $233.65 after a report that Delta Air Lines sought compensation from the cybersecurity firm and Microsoft for the carrier’s global cyber outage earlier this month.

Cybersecurity and cloud services company F5 surged 12.99% to $200.66 after forecasting fourth-quarter results above estimates.

Advancing issues outnumbered decliners by a 1.54-to-1 ratio on the NYSE. On the Nasdaq declining issues outnumbered advancers by a 1.16-to-1 ratio.

The S&P 500 posted 73 new 52-week highs and one new low while the Nasdaq Composite recorded 133 new highs and 126 new lows.

Volume on U.S. exchanges was 11.25 billion shares, compared with the 11.19 billion average for the full session over the last 20 trading days.

(Reporting by Chuck Mikolajczak; Editing by Richard Chang)

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