The memory chip concept stock market stalled and the Philadelphia Semiconductor Index fell into a technical bear market Analyst: Market expectations are clearly ahead of reality

The Zhitong Finance App learned that after experiencing a sharp rise driven by the memory chip market, the US semiconductor sector ushered in a sharp correction. The Philadelphia Semiconductor Index plummeted 5.7% intraday on Friday. Although the decline narrowed to 1.6% at the close, the cumulative retracement reached 20% from the all-time high set at the end of June, and officially fell into a technical bear market.

Previously, the index had a cumulative increase of 105% from its low in March this year to its high at the end of June, doubling in just three months. Recently, however, many star chip stocks have continued to decline, and Micron Technology (MU.US), Arm Holdings (ARM.US), and Intel (INTC.US) have all fallen by more than 30% from their respective highs.

James Abate, head of fundamental strategy at Horizon Investments, said that although the fundamentals of the industry are still improving, stock prices are rising significantly faster than fundamentals have improved. The semiconductor index has almost shown a “parabolic rise” before, but it is not surprising that there is an adjustment now.

Meanwhile, market concerns about the sustainability of the AI investment boom are once again heating up. Investors are beginning to question whether hyperscale cloud service providers such as Microsoft (MSFT.US), Amazon (AMZN.US), and Meta (META.US) will be able to maintain trillions of dollars in AI infrastructure capital expenditure in the future. Furthermore, the semiconductor sector continues to be highly valued, causing the market to worry that rising stock prices have overshadowed future growth expectations.

Muneeb Muzaffar, senior portfolio manager at Bold Wealth Partners, said that although the fundamentals of the industry are still strong, market expectations are clearly ahead of reality. The current valuation reflects the most optimistic growth scenario. Investors are beginning to re-evaluate how much the profits of chip companies are actually worth and whether previous excessive growth expectations need to be corrected.

In the next few weeks, the AI industry chain will usher in a critical verification window. Alphabet (GOOGL.US) will be the first to announce quarterly results after the US stock market on July 22, and Microsoft (MSFT.US), Amazon (AMZN.US), and Meta (META.US) will also release financial reports one after another in the following week. Their AI capital expenditure plans and return on investment will be the focus of market attention.

Muzaffar said that the market needs to see that AI investment by hyperscale cloud vendors can bring a more clear return on investment. As long as capital expenditure can continue to be verified, related companies will continue to invest, and chip makers will continue to benefit. However, the combination of factors such as current overvaluation, market sentiment, and capital flow makes the short-term trend of the sector more complicated.

As one of the leading sectors in the current round of market growth, memory chip companies have not been spared either. As the market begins to worry about when supply will catch up with rapidly growing AI demand and whether profit growth will remain high, Micron Technology (MU.US) has already dropped 30% from its high point, while Western Digital (WDC.US) and SanDisk (SNDK.US) have both declined by more than 35%.

South Korea's Samsung Electronics announced a 19 times year-on-year increase in quarterly profit at the beginning of this month, but since the stock price had accumulated a cumulative increase of about 150% during the previous year, the performance still did not meet the higher expectations of the market, and the stock price then fell sharply.

Taiwan Semiconductor Manufacturing Company (TSM.US), a leading global foundry company, also experienced a return in profits. Despite the company's annual capital expenditure and revenue forecast raised this week, the stock price fell for seven consecutive trading days, with a cumulative decline of 8.8%, the longest continuous decline since July 2022.

However, judging from the performance throughout the year, the semiconductor sector still outperformed the market significantly. Up to now, the Philadelphia Semiconductor Index has accumulated a cumulative increase of about 65% during the year, far higher than the S&P 500 index's increase of about 9%. According to analysts' aggregated data on target prices for the index's 30 constituent stocks, the market is still generally optimistic that the index is expected to rise by about 34% in the next 12 months.

Abate said investors need not panic too much about the current adjustments. “Even if the index has dropped 20% from a high point, it has only returned to May levels; there is no need to overreact.”