AI summary
Summary of article:
The key to the market outlook for AI stocks lies in three changes: data center development progress, capital spending of major cloud manufacturers, and profit estimates of chip factories. If construction is simply postponed, a rebound may be beneficial, but if orders and profits are simultaneously revised downwards, selling pressure may still continue.
After the US midterm elections,US stocks After a sharp rise on Wednesday, there was a sharp fall on Thursday and stock rotation failed. The Philadelphia Semiconductor Index fell 12.3%, and the Nasdaq Composite improved. Investors originally expected Congress to investigate Trump,iran The war has probably calmed down, and then attention will turn to whether the data center can be built as planned. Next, whether chip stocks can stand firm depends on how long construction projects are delayed, whether big cloud players reduce spending, and whether analysts will revise down their profit forecasts.
After the Democratic Party won big victories in the congressional and gubernatorial elections, the market’s first concern was that local governments would tighten the conditions for the development of data centers.texas Governor-elect Hinojosa advocates an immediate halt to development, and construction projects in places like Texas and Ohio could also face stricter power supply and water requirements. Congress’ strengthening scrutiny and promoting AI security legislation is another layer of pressure facing the technology industry. State and local governments are still the ones that can directly influence the progress of construction.
Industry players have started to respond. OpenAI on Thursday said it will avoid signing confidentiality agreements when negotiating data center development projects and ensure that residents do not have to bear the electricity costs of the project. If the industry is willing to bear higher costs, some construction projects may still go ahead, or they may be moved to other states for construction. For TSMC and Taiwanese equipment suppliers, they should first see whether customers adjust their purchasing and delivery schedules. If construction is simply postponed, orders may be held back. If major cloud manufacturers also reduce their investment scale, this will further impact the demand for chips and equipment.
Financial reporting is also a factor in this decline in chip stocks. Although Qualcomm and Arm’s financial reports were better than expected, the weakness and outlook of the mobile phone market still disappointed investors. Intel’s PC business is also shrinking. AI was originally the most promising source of development for the chip industry. Now that the expansion progress has changed, the market will have to reevaluate next year’s shipments and profits. If expansion slows, tight supply conditions may worsen, and some memory and device manufacturers will find it difficult to maintain their original selling prices and profit margins.
“Barron’s” reported that the price-to-earnings ratio of the iShares ETF (SOXX), which tracks semiconductor stocks, has fallen from 33 times expected profits over the next 12 months to about 16 times in June. UBS believes chip stocks reflected many concerns about a slowdown in manufacturing. But these price-to-earnings ratios are still based on current profit estimates. If customers continue to buy and profit projections can be maintained, high-quality chip stocks that have fallen deeply may be purchased first. If the order and profit are revised downward one after another, even if the stock price has fallen significantly, it may still be under selling pressure.
Thursday’s fall also reflected a simultaneous withdrawal of funds from stocks that had earlier risen sharply. ETFs tracking U.S. stock momentum strategies fell 8.2%, and the VIX index rose to 28.18. Some hedge funds that had adopted a similar strategy were forced to reduce their stakes, while larger funds that could have taken advantage of the decline have pulled back. Next, we can see if volatility subsides, and whether buy orders can spread from a few large stocks to other suppliers as chip stocks surge.
The Nasdaq Composite has recovered ten times over the past decade, with some of those losses continuing into the next month. Starting from the low point of each correction, the index rose by an average of 9.4% after three months and by an average of 17.0% after half a year. But this set of numbers will only be meaningful until a low point is established. After falling into correction territory in January 2022, the Nasdaq fell 18.3% over the next half year.
Whether this wave can turn from rebound to stabilization depends on what conditions the state government ultimately imposes, whether major cloud manufacturers maintain capital spending, and whether chip factories can stick to their profit forecasts. For Taiwan’s supply chain, whether customers only push back delivery dates, or whether they also cut purchase quantities, will be the basis for judging whether this wave of decline has harmed the fundamentals.
Summary FAQ
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The most important issues are how long the data center construction project will be delayed, whether cloud giants will reduce capital spending, and whether analysts will revise profit forecasts for chip factories. If these three things go wrong, AI stocks will be under greater pressure.
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If the manufacturing schedule is simply pushed back, chip and equipment orders will mostly be delayed, and demand will not necessarily disappear; But if cloud companies also reduce the scale of investment, it will actually harm TSMC and Taiwan’s supply chain.
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Because the current downward revision of the price-to-earnings ratio mainly reflects the adjustment in sentiment and expectations, it still depends on whether orders and profits can be maintained. If subsequent profit estimates are revised downwards, even if the share price drops significantly, it may still be under selling pressure.
