Intel earnings arrive as Wall Street questions the AI chip rally
Chipmakers are expected to drive nearly half of S&P 500 profit growth, but investors are becoming less forgiving after months of soaring valuations.
Chipmakers have become the center of attention on Wall Street, with their shares turning increasingly volatile as investors rely on a small group of highly valued companies to drive a large share of overall market earnings growth.
The PHLX Semiconductor Index (SOX) has surged this year, fueled by massive gains at companies including Micron Technology, Advanced Micro Devices and Broadcom. But in recent weeks, the 30-stock index has become a showcase of extreme market swings.
The index is up 65% this year, compared with a 9% gain for the S&P 500, but has fallen 18% in July alone after moving at least 3% higher or lower on half of the month's trading days. By Friday, the semiconductor index had fallen more than 20% from its record closing high reached in late June.
The volatility reflects growing investor questions about whether the surge in artificial intelligence-related chip demand can continue at its current pace, and whether earnings growth will be strong enough to justify the sector's enormous gains.
"Daily moves for companies this big are just shocking," said Rick Meckler, partner at Cherry Lane Investments. "Would the earnings picture change that? Certainly a disappointing outlook could."
Expectations for semiconductor companies remain extremely high. Earnings for S&P 500 semiconductor and semiconductor equipment companies are forecast to rise 133% in the second quarter compared with a year earlier, according to LSEG data. The group is expected to account for approximately 44% of total S&P 500 earnings growth during the quarter.
Overall S&P 500 earnings are expected to rise 26% year over year in the second quarter.
Among major U.S. chipmakers, Intel and Texas Instruments are scheduled to report results this week, while Nvidia, the world's most valuable chip company and a key beneficiary of the AI boom, is not due to report until late August.
However, recent market reactions suggest investors have become less willing to reward strong results automatically.
Shares of Taiwan Semiconductor Manufacturing Company, the world's largest contract chipmaker, fell last week despite the company reporting a 77% increase in second-quarter net profit and exceeding analyst expectations. Earlier this month, shares of Samsung Electronics also declined sharply despite the company reporting a 19-fold increase in second-quarter operating profit.
The recent weakness has raised concerns that expectations surrounding AI-related semiconductor demand may have become too optimistic.
Some analysts also point to the growing role of retail investors and leveraged exchange-traded funds in amplifying price movements. Leveraged ETFs can increase volatility by creating additional buying pressure when stocks rise and accelerating selling when prices decline.
"One thing that's driven a lot of these stocks has been option activity by retail investors," Meckler said. "That's a big factor in just how volatile the stock moves have become."
South Korea's financial regulator recently announced measures aimed at reducing volatility linked to single-stock leveraged ETFs tied to major chipmakers Samsung Electronics and SK Hynix.
Investment firm BTIG recently noted that while semiconductor stocks' performance has been remarkable, their volatility has also raised concerns, with some market patterns resembling those seen before the 2000 dot-com bubble peak.
The surge in semiconductor stocks has been largely powered by massive spending on artificial intelligence infrastructure. But some investors are questioning whether the current level of optimism can be sustained.
"This chip demand for AI is not a forever scenario," said Jake Dollarhide, CEO of Longbow Asset Management. "Anybody who disappoints is going to get clobbered."
Historically, chipmakers have been viewed as cyclical companies whose fortunes rise and fall with broader economic activity. The AI boom has strengthened demand, but has also increased the sector's dependence on expectations surrounding a single technology trend.
Still, some investors argue that semiconductor growth is becoming broader than just AI data centers.
Daniel Morgan, portfolio manager at Synovus Trust, pointed to demand from industrial electronics, wireless communications and automotive applications as additional sources of growth.
"The only place where I still see continued weakness is in the chips that go into handsets," he said, citing companies such as Qualcomm.
