Why the chip stocks wobbled
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Semiconductor stocks are the clear winners in terms of profiting from the AI buildout, with their results a key to the market's climb this year.
Why it matters: Strong earnings growth is a core reason stocks have been able to stand up to the surge in interest rates over the last few months.
- Earnings per share for the S&P 500 were up roughly 50% annually in the second quarter and are expected to have climbed about 30% in the third quarter, once reporting season is done.
- That growth has enabled stocks to hang on to their gains for the year — about 14% — and even notch a new record high last week.
Yes, but: As we — and others — have pointed out, an outsized share of the market's profitability hangs on a handful of AI chip and hyperscaler stocks.
Case in point: As the above chart shows, chipmakers Micron Technology, Nvidia and Broadcom are expected to provide nearly 40% of third-quarter earnings growth for the entire S&P 500.
The latest: At the same time, chip and chip-related stocks took another tumble Tuesday, adding to a surprisingly weak stretch for the sector's shares.
- The SOX chip index slipped 0.2%, its fifth consecutive loss.
- Semiconductor manufacturing equipment maker Applied Materials (down 6.7%) was the second-worst performer in the S&P 500 after announcing plans to spend $5 billion on an advanced R&D center in Silicon Valley.
- Investors and traders seem leery of splashy multibillion-dollar bets on the AI future lately, with Broadcom CEO Hock Tan telling conference goers in Singapore bluntly on Monday that "a lot of investors have no clue what they are investing in" and a lot of AI customers don't get much out of it.
What they're saying: "Most companies out there cannot find any bloody return on investment, I'm telling you," Tan said, according to the Singapore-based Business Times. "People are just wasting money spending tokens."
The bottom line: The comments from the Broadcom CEO baffled some in the markets. (This is coming from one of the biggest winners of the AI boom!)
- Perhaps he is preparing the market for a kind of reset after such a record run for the chip sector? In any case, it's not much of a confidence builder.
