Chip stocks tumbled even as one of the world's biggest tech companies posted its best profit ever. The selloff shows that investors are starting to doubt whether the artificial-intelligence boom can keep fueling higher prices.
A gauge of semiconductor firms sank 4.5% in a broad selloff. The Nasdaq 100 fell 1.5%. SpaceX joined the index. Samsung Electronics Co. reported a record profit, but that good news did not stop the slide.
Investors shifted money out of chips and into other sectors. The trigger was a simple fear: after an enormous run-up from war-driven lows, the rally in AI-related stocks had made them too expensive. Many traders wondered if the massive investments in artificial intelligence would ever pay off.
Oil prices also moved. Following an attack on three vessels in the Strait of Hormuz, US oil rose to $70 a barrel. The strikes stoked fresh fears of a supply crunch that might push energy costs higher and stoke inflation. The higher oil cost pushed the yield on 10-year US Treasury bonds up to 4.5%.
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The combination of expensive tech stocks and rising energy prices made investors nervous. A rotation is happening - money is moving from semiconductor stocks into other areas. Some strategists say this move inside the tech sector itself is the most important trend to watch.
Ulrike Hoffmann-Burchardi, from UBS Chief Investment Office, commented: "While we remain confident in AI's growth story and continue to see attractive opportunities in semis and hardware, we have also highlighted that the next leg of equity gains is likely to be marked by a broadening of market leadership." In plain words, she believes AI is still a good bet, but other stocks will also start to lead.
Mike Wilson of Morgan Stanley put it bluntly: "You can't have this divergence continue, it's not sustainable." He argued that momentum in chipmakers is fading as investors shift to laggards - stocks that have been left behind - such as hyperscalers.
Matt Maley at Miller Tabak added: "The issue of rotation between different sectors is a popular one right now, but the rotation within the tech sector could be the most important one to keep an eye on."
Veteran strategist Ed Yardeni warned that technology firms, especially hyperscalers, might not beat analysts' overly optimistic estimates for the quarter. "That could cause a correction among technology stocks," he said. But Yardeni added: "The overall stock market might dodge a correction if investors rotate into sectors that have lagged and report better-than-expected earnings. We are in the rotation camp for the stock market's outlook up ahead."
If hyperscalers and other tech firms fail to beat analyst estimates, stocks could fall further.
Some strategists expect investors to keep rotating into lagging sectors that report surprisingly good results. The question is whether the broader market can hold up while tech takes a breather.
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