The Volatile State of Global Semiconductors
Global semiconductors, after more than a year of carrying the stock market on their shoulders, are in a volatile free fall.
Fears of an AI Bubble
The rout in these stocks sparked fears of an AI bubble that, should it burst, could send the tech industry, and perhaps the entire market, into turmoil. Over the past month, major semiconductor stocks have taken a beating in the stock market. Nvidia fell 14%; Advanced Micro Devices (AMD) 19%; TSMC, which is facing its own set of geopolitical complications, dropped 15%; and Arm, the British manufacturer of chips, dropped 31%—including 24% since the start of this week. Intel’s stock saw its worst day in 50 years when the stock fell 27% on Friday, on news it was suspending its dividend and laying off 15,000 employees.
Potential for Further Decline
Semiconductor stocks could see a further decline of between 15% and 25%, according to Sandeep Rao, an analyst at investment firm Leverage Shares. Rao added that Nvidia and Arm could be near the top of that range, while TSMC would be somewhere in the middle.
Challenges of AI Hype
The problem with the AI hype, Rao argued, is that it has simply taken too long to materialize. Investors were promised a world-beating technology that would revolutionize personal electronics and business. Instead they’ve been forced to confront sky-high valuations and longer investment horizons than they had originally planned for. “This commonsense realization is only now beginning to sink into the investor space as FOMO peters out and economic considerations are being examined critically,” Rao told Fortune.
Macroeconomic Factors at Play
The market for AI stocks hasn’t been helped by the fact that investors are now preparing for another major macroeconomic narrative: imminent interest rate cuts. Under the assumption the Federal Reserve is poised to cut interest rates as early as September, investors have started recalibrating their portfolios. That meant a rotation away from overpriced large-cap tech stocks toward small-cap stocks, which usually benefit the most from lower interest rates.
Individual Company Performance
Despite the industrywide selloff, the performance of those individual semiconductor companies is positive—further evidence that broader market trends explain the stock declines rather than issues with the manufacturers themselves.
High Expectations and Market Reactions
With tech valuations so high, anything short of a stellar earnings report can cause the stock to drop. Many of these tech stocks are priced “to perfection,” which means their current valuation leaves virtually no room for any hiccup or piece of bad news, no matter how small, according to de Chazal. “Over the last year or so, the continued stellar performance from the Magnificent Seven has justified such valuations,” de Chazal wrote in an analyst note on Friday. “Now, however, when activity is only slightly disappointing, those large tech companies are being taken to the woodshed.”
Looking Ahead
Investors are eager to understand how soon AI will start to materially impact earnings. “People are also questioning the impact of AI and how soon it will start to materially impact earnings—and the answer seems to be not as quickly as they thought,” de Chazal said.
Conclusion
Even promises from tech CEOs to “overinvest” in AI didn’t calm investors. Many are concerned that big expenditures in the present will inevitably lead to a slowdown in the future, according to Morningstar tech analyst Brian Colello. However, some view the recent declines as a chance to buy the dip, maintaining a positive outlook on the AI growth story.
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