- Semiconductor stocks erased up to $1.3 trillion in market capitalization as markets digested a series of news.
- While stocks recovered slightly on Monday, they sold off again on Tuesday and Wednesday, underscoring growing concerns among investors about an overheated market supported by external factors.
- Demand for chips remains strong, but a number of external factors and investor fear of the AI narrative may have tipped the scales considerably for many.
Chip stocks have had an impressive run in recent years, driven by red-hot industry demand, rising demand forecasts, and increasingly expensive and labyrinthine designs.
This impressive rally has led many investors to jump on a seemingly endless bandwagon, at least in the long term, as estimates, price targets and outlooks have improved across the board over the past two years.
However, current moves in the stock market are giving investors pause, as three of the last four trading sessions ended below the previous day’s close.
A market in trouble or external factors?
While there is little to dispute the fact that the current drop in chip stocks was sparked by Broadcom recently releasing softer guidance for its AI chip sales for the coming quarter, much of what has happened since then could be something out of the control of semiconductor companies and their CEOs, even as they release stellar projections and continue to beat earnings estimates.
The results were somewhat devastating: Marvell plunged 17%, Micron lost 13%, Intel and AMD fell about 11% each, and Nvidia’s comparatively modest 6% drop pushed the world’s most valuable company back below the $5 trillion mark.
Friday’s move was also exacerbated by investors’ reaction to other news: a stellar jobs report showing 172,000 jobs added to the U.S. labor market, nearly double the 80,000 that most economists had forecast. While this looks like good news on paper, it makes a potential interest rate cut increasingly unlikely.
A rate cut is doubly important here for AI-related stocks; Not only does it allow investors to get cheaper money to buy more shares and shore up the financing needs of an increasingly capital-intensive AI data center market, it also reduces the debt and securities burden already at stake for many of the world’s largest data center companies, making it easier and cheaper to borrow more.
Investors are also reeling from a renewed conflict between the United States and Iran, further exacerbating an already fragile oil market and complicating future inflows from the Gulf states, a key market for AI investment, while driving up energy prices across the board, even as it risks spreading to other regions.
At the same time, with SpaceX’s IPO ($1.75 trillion) about to launch, along with investors eyeing an increasingly volatile crypto market, and Anthropic ($965 billion) and OpenAI (approximately ~$1 trillion) filing IPO documents, the market must account for at least 3 new sub-$1 trillion IPOs in the near future, and the capital that must be rotated out of existing positions to fund them constitutes a perfect storm in more ways than one.
The fundamentals, while strong for now for chip stocks, are under increased scrutiny, prompting some investors to shift them into safer havens, including cash, bonds and the more balanced S&P 500 index. It remains to be seen if this is a sign of things to come or simply AI trading is taking a pause.
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