By Caroline Valetkevitch
NEW YORK, July 20 (Reuters) – Chipmakers are in focus on Wall Street, with their shares turning mercurial this month and investors banking on a few dozen newly valuable companies to deliver nearly half of S&P 500 profit growth for the second quarter.
The PHLX Semiconductor index has surged this year, reflecting massive gains at firms such as Micron Technology, Advanced Micro and Broadcom, but lately the 30-stock index has become a volatility show. The index is up 65% for the year, compared with a 9% gain in the S&P 500, but is off 18% for July after swinging at least 3 percentage points up or down on half of the month’s 12 trading days.
The semi index also ended Friday down just over 20% from its late-June all-time closing high.
Worries about the sustainability of AI demand for chips and the boom-bust trading in semis have prompted investors to reassess the sector. Results should be strong, but will they be enough to break the summer swoon? And if not, does a rockier summer lie ahead for the rest of the market, given the scale of this surging sector?
“The daily moves for companies this big are just shocking,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey. “Would the earnings picture change that? Certainly a disappointing outlook could.”
BIG GAINS ON THE BOTTOM LINE
Earnings for S&P 500 semiconductors and semi equipment companies are forecast to rise 133% for the second quarter from a year ago, with the group expected to contribute about 44% of overall S&P 500 company earnings gains, according to Tajinder Dhillon, head of earnings research at LSEG.
Earnings for S&P 500 companies overall are expected to have increased 26% in the second quarter from a year ago, based on LSEG data as of Friday.
Among U.S. chipmakers, Intel and Texas Instruments are due to give results this week. Nvidia’s results are not due until late August.
But the market reaction to some prominent earnings reports this past week suggests sentiment has begun to shift. On Thursday, U.S.-listed shares of Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker, slipped even though the company posted a 77% jump in second-quarter net profit and beat market forecasts.
Earlier this month, shares of Samsung Electronics fell sharply even though the company reported a 19-fold jump in second-quarter operating profit.
SCRUTINIZING THE ROLE OF LEVERAGE
Market watchers in part pin the volatility on the SOX and its constituents becoming retail favorites and fueling the rise of leveraged exchange-traded funds. Leveraged ETFs amplify market volatility by creating additional demand for shares when they rise and prompting more selling when they fall.
“One thing that’s driven a lot of these stocks has been option activity by retail investors. That’s a big factor in just how volatile the stock moves have become,” Meckler said.
South Korea’s financial regulator on Thursday unveiled regulatory measures to ease market volatility triggered by single-stock leveraged ETFs. These ETFs, linked to chipmakers Samsung Electronics and SK Hynix, were introduced in South Korea in late May.
“While the performance of the semiconductor space has been something to behold, so too has its volatility,” BTIG wrote in a recent note. That has set off some ominous signals, with “many of them rhyming with the March 2000 peak,” it added.
Rising AI spending has helped drive the chips frenzy, said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, but worries are now taking hold that the optimism is overheated.
“This chip demand for AI is not a forever scenario,” Dollarhide said. And during the earnings season, “anybody who disappoints is going to get clobbered.”
Chipmakers have long been considered cyclical companies whose rise and fall depend in large part on activity elsewhere in the global economy. The rise of AI has intensified that relationship.
One reason for optimism may be that it is more than just data center exposure that is boosting demand, said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, citing industrial electronics, wireless communications and cars. “You’re seeing a broadening out,” he said.
“The only place where I still see continued weakness is in the chips that go into handsets,” he said, noting that Qualcomm is among those chipmakers.
(Reporting by Caroline Valetkevitch; additional reporting by Noel Randewich in San Francisco, editing by Colin Barr and Nick Zieminski)