Thursday was a challenging day for much of the technology sector, especially semiconductors. The popular Philadelphia Semiconductor Index (SOX) fell 350 basis points, with good hands and favored stocks down 4-6% with no significant events.
“No incremental and new negative news flow or data points on the fundamental side of the equation creating a rush to the exit,” Mizuho analysts noted.
“That’s the good part,” they added.
Mizuho believes the market saw a rotation into rate-sensitive winners as the lower Consumer Price Index (CPI) report fueled speculation that the Federal Reserve could cut rates as early as September.
While active fund managers may not have been in a rush to sell Big Cap Tech and Semiconductor winners to invest in residential, biotech, utilities, real estate, small caps and REIT stocks, quantitative and passive strategies likely took that action.
The bigger question looming now, according to analysts at Mizuho, is the impact of the upcoming PPI data release at 8:30 a.m. ET. If it gets weaker, it could cause further rotation out of the semiconductors and technology.
Analysts believe Thursday’s sell-off was a “wake-up call,” indicating it may be time to start taking profits on big tech and semiconductor AI winners. There were significant gains in these stocks last week, without any new developments.
“It just didn’t seem healthy to me as valuations are only going higher ahead of the second half of July earnings season. The big and fast rotation from Software to Semis this week only made yesterday more painful,” analysts continued.
The broader sell-off and rotation out of semiconductors yesterday could be a taste of what’s to come if Nvidia (NASDAQ:) ultimately just steers “inline” or misses expectations.
“Yes, that day will happen eventually. Trust me. No idea how soon and in what quarter. Not likely in CY24, or even early CY25, in my opinion,” Mizuho analysts added.
“But it does happen, and yesterday’s wide sale and rotation OUT OF SEMIS was a quick sneak preview. When you unwind, think of “no place to hide.” All semi-finals will go lower.”
The collapse of semiconductor equipment stocks such as Applied Materials (NASDAQ:), KLA Corp (KLAC) and Lam Research (NASDAQ:), which fell 450-600 basis points without bouncing back, exemplified the potential for an eventual unwinding of the semiconductor market. .
These stocks, which were largely owned by AI winners and non-tech generalist investors who viewed them as “the spearhead of the AI expansion,” sold off quickly.
“So when these funds or momentum strategies see a potential collapse or rotation, they sell first and ask questions later,” Mizuho analysts noted.
They speculate that NVDA and AI semiconductor development could emerge as major cloud hyperscalers discuss how to moderate, rather than limit, the growth of their capital investments. While they don’t expect this to happen in CY25, they warn that if investors start to worry that calendar years 2025 or 2026 could represent a short-term peak, many will likely sell before any actual signals emerge.
