Chipmakers' Profit Gains Face Volatility Test
· news
Chipmakers’ Profit Gains May Not Be Enough to Stem Volatility
The semiconductor industry’s meteoric rise has been a defining feature of the market’s performance this year. The PHLX Semiconductor index, which tracks 30 major chipmakers, has surged an astonishing 65% in 2023, outpacing the S&P 500’s 9% gain. However, beneath these impressive numbers lies a more nuanced reality: volatility has become the watchword for this sector.
The industry’s growth is driven by increasing demand from companies developing artificial intelligence and other emerging technologies. This has led to investors flocking to chipmakers like Micron Technology, Advanced Micro, and Broadcom, hoping to capitalize on what promises to be a strong earnings season. However, many of these stocks have become trading favorites among retail investors, who are buying up shares using leveraged exchange-traded funds (ETFs). These instruments amplify market volatility by creating additional demand for shares when they rise and prompting more selling when they fall.
The semiconductor index has been careening from one extreme to another, with its value swinging at least 3 percentage points in either direction on half of the month’s trading days. The latest data from earnings research firm LSEG suggests that chipmakers are poised for strong profits. Earnings are forecast to rise 133% for the second quarter compared to a year ago, with this sector contributing around 44% of overall S&P 500 company earnings gains.
However, some high-profile companies have already begun to send warning signals: Taiwan Semiconductor Manufacturing’s shares slipped despite posting a 77% jump in net profit, while Samsung Electronics saw its stock fall sharply despite reporting an 19-fold increase in operating profit. The question on everyone’s lips is whether these profits will be enough to stem the tide of volatility.
With Intel and Texas Instruments set to release their earnings this week and Nvidia’s results not due until late August, investors are eagerly awaiting any sign that the sector can stabilize its trajectory. As Rick Meckler, partner at Cherry Lane Investments, noted, “The daily moves for companies this big are just shocking.” It remains to be seen whether even strong earnings will be enough to calm the storm.
The contrast between the semiconductor industry’s performance and that of the overall S&P 500 couldn’t be starker. While chipmakers have been rising to unprecedented heights, the broader market has been struggling to find its footing. The sector’s volatility is not just a reflection of its own fortunes but also those of the rest of the market.
The use of leveraged ETFs in the semiconductor industry raises important questions about the role of leverage in fueling market volatility. By amplifying market movements, these instruments create additional demand for shares when they rise and prompt more selling when they fall. This can create a self-reinforcing cycle that exacerbates price swings.
The current situation bears some resemblance to the dot-com bubble of the late 1990s, when investors became enamored with technology stocks and fueled their growth through speculative buying. However, there are also key differences: today’s chipmakers are driven by a combination of technological innovation and emerging demand from industries like AI.
As the earnings season unfolds, investors will be watching closely for any signs that the sector can stabilize its trajectory. But even if profits continue to soar, it remains to be seen whether this will be enough to calm the storm. One thing is certain: the semiconductor industry’s bubble has burst, and its fate hangs precariously in the balance.
The question now is whether chipmakers’ profits will be enough to save the sector from itself. The answer lies in the results of Intel, Texas Instruments, and other major players over the coming weeks. But as the market continues to grapple with this issue, one thing is clear: the semiconductor industry’s rise has created a bubble that threatens to burst – and if it does, the consequences for the broader market could be far-reaching indeed.
Reader Views
- RJReporter J. Avery · staff reporter
While investors are fixated on chipmakers' surging profits, they'd do well to remember that the industry's growth is heavily reliant on a select few megatrends, particularly AI and 5G. This concentration of risk means that even if earnings continue to soar, a slight hiccup in one of these trends could send shockwaves through the sector, putting those leveraged ETFs – and the investors who've piled into them – at risk of getting burned.
- CMColumnist M. Reid · opinion columnist
While chipmakers' profit gains are certainly eye-catching, the industry's reliance on volatile trading instruments and retail investor frenzies threatens to undermine long-term growth. As more individual investors pile into leveraged ETFs, they're not only amplifying market swings but also masking fundamental weaknesses in companies that can't deliver stable earnings despite strong top-line growth. This sector's momentum may be fueled by artificial intelligence adoption, but without consistent profit margins and a diversified revenue base, even the strongest chipmakers will eventually face a reckoning.
- CSCorrespondent S. Tan · field correspondent
The semiconductor sector's rollercoaster ride is far from over. While earnings growth looks stellar on paper, what investors may be overlooking is the industry's vulnerability to supply chain disruptions and emerging competition from Asian players like China's SMIC. As Taiwan Semiconductor Manufacturing's results demonstrate, even strong profits can't shield companies from market volatility when investor sentiment turns sour.