Tech Stocks Slide as Semiconductor Index Drops 6% Despite Strong Earnings
This article first appeared on GuruFocus.
Technology earnings are reinforcing investor concerns that the powerful first-half rally may have pushed parts of the sector too far, with the market becoming increasingly reluctant to reward rising profit forecasts. The MSCI World Semiconductor Index has fallen 6% in July as investors took profits from chipmakers, while software stocks have gained a more modest 1%. EPFR Global analysts, including Winston Chua, said traders were moving away from technology stocks, pointing to the long-short ratio on Nasdaq 100 futures, which dropped 63% over the past year and reached a 17-year low on July 14. These moves suggest positioning and elevated expectations may now matter as much as underlying earnings growth when investors assess technology stocks.
STMicroelectronics (NYSE:STM), a chipmaker, fell 18% on Thursday after its outlook came in below sell-side forecasts, while Texas Instruments (NASDAQ:TXN), a U.S. chipmaker, declined 3% despite providing an upbeat outlook. Simone Ragazzi, a senior equity analyst at Algebris Investments, said investors had rotated aggressively away from AI-related stocks amid concerns about infrastructure overcapacity, uncertain returns on large investments, stretched valuations and possible demand moderation. He also pointed to the delayed OpenAI IPO and stronger competition from Chinese AI models as additional concerns, although he said underlying fundamentals remained strong as analysts continued raising capital-expenditure forecasts for hyperscalers. Ken Hui, a director at Bakewell Alpha Fund, said his team reduced or exited holdings in Taiwan Semiconductor Manufacturing, a chipmaker, BE Semiconductor Industries, a semiconductor company, and STMicro before their earnings reports despite maintaining positive long-term views, with the possibility of buying again if valuations become more attractive.
Software stocks, however, have received a more supportive response after profit warnings from IBM, a technology company, and Accenture, a professional-services company, increased concerns that advanced AI tools could disrupt the sector. Dassault Systemes (DASTY), a software company, rose on Thursday after delivering results in line with expectations, while SAP (NYSE:SAP), a software company focused on cloud services in the source article, advanced in U.S. trading after cloud revenue matched forecasts. JPMorgan Chase, a financial-services company, said hedge funds had become unusually underweight hyperscalers and Magnificent Seven stocks even as many companies in the group continued producing strong earnings and increasing capital expenditure. JPMorgan derivatives strategists, including Adam Halmi, recommended buying a call spread on the Magnificent Seven basket, arguing that heavily reduced positioning could support the group if its members broadly avoid disappointing investors during earnings season.
