Chip stocks have been hyped for months, and the gains have been gigantic thanks to the AI boom. The fear in the market now is that too many investors are shying away because valuations are too high and that share prices could fall significantly. An industry index (Philadelphia Semiconductor Index) slipped 4% yesterday. Is it the start of a significant correction in the industry?
The global selloff in semiconductor stocks accelerated yesterday on concerns about the lofty valuations of some of the artificial intelligence boom’s biggest winners, according to Bloomberg News. It is also reported: Memory manufacturers Samsung Electronics and SK Hynix caused South Korea’s leading Kospi index to fall by up to 6.2% today before it was able to recoup much of its losses. Japan’s Advantest fell as much as 10%, while Asia’s largest stock Taiwan Semiconductor Manufacturing (TSMC) fell more than 3%. All of these companies are suppliers to Nvidia.
Selling pressure reduced the total market capitalization of the Philadelphia Semiconductor Index by about $500 billion on Tuesday and a Bloomberg index that tracks Asian chip stocks on Wednesday. The decline signals growing uncertainty about the sector’s earnings potential and high equity valuations, particularly if interest rates remain elevated for longer. At the same time, a feeling of missing out (FOMO) is driving some investors to buy back in.
“I wouldn’t say buy now on dips – much of the rally had nothing to do with fundamentals, so there’s no point in calling it a bargain buy now,” said Chauwei Yak, managing director of multi-strategy hedge fund GAO Capital in Singapore. “But if some of the big tech stocks are down 15% or 20%, then maybe we can think about it.”
Wall Street bosses’ warning of an overdue correction has weighed on the sector this week, as have lower expectations of interest rate cuts from the Federal Reserve and the ongoing U.S. government shutdown. Hedge fund manager Michael Burry contributed to the selloff with his disclosure of bearish bets on Palantir Technologies and Nvidia. Palantir contributed to Wall Street’s slump with a forecast that failed to impress investors. A similar reaction to Advanced Micro Devices’ after-hours results and outlook added to the impact on Asian trading today.
“It’s a sea of red numbers across broad markets that paints a bleak and murky picture of the risks,” said Chris Weston, head of research at Pepperstone Group. “We need to remain open to the possibility that this could get worse. Put simply, there aren’t many reasons to buy here.”
Concerns that stocks appear expensive have increased. The Philadelphia SOX index trades at 28 times estimated forward earnings (P/E) compared to its five-year average of less than 22 times.
Some see the decline in chip stocks as a positive because it cools the overheated rally somewhat and makes stocks a little cheaper. As global hyperscalers like Amazon and Meta Platforms invest more money in AI, chipmakers and other technology companies are likely to see further benefits in their earnings and stock prices.
For the time being, institutional and private investors alike have to deal with the daily fluctuations. Goldman Sachs Group’s Retail Favorites Index fell 3.6% on Tuesday, losing about three times as much as the S&P 500 Index.
Vikas Pershad, Asian equity portfolio manager at M&G Investments, was up virtually all night following the market chaos in Singapore. “I followed developments until I went to bed at 4 a.m. when the U.S. markets closed, took a short nap and then prepared for Asia,” he said. “We’ve come this far so quickly that investors shouldn’t be surprised if this continues tomorrow and the day after,” he said, adding that it was a good time to look for buying opportunities.
FMW/Bloomberg
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