22 April 2024 Equities | US

Equities and the MacroSphere: What Next After Tech Selloff?

By John Tierney

Summary

Last week’s selloff in the semiconductor sector most likely opens opportunities to establish positions in the AI hardware sector. Commodity chip producers will continue struggling.
The Federal Reserve (Fed) may not be cutting rates for now – but we see zero likelihood it will raise rates. And if the economy slows, we expect rate cuts to be on the table again – both of which should keep a floor under equity valuations.
Some 265 companies report this week, including tech giants Alphabet, Meta Platforms, and Microsoft. They should validate or dispel the gloom from last week’s selloff.

Market Implications

Markets will soon forget last week’s tech selloff as a flood of earnings and economic reports provide new information about corporate health and likely Fed policy in coming months.

What We Learned Last Week

You would think Nvidia (NVDA), Super Micro Computer (SMCI), and Netflix (NFLX) would hold up in a soft market. Oops. Broader markets were down 3-5% last week; all three of these companies dropped over 10% – correction territory. Relative to their recent highs, NVDA is on the verge of a bear market; SMCI is down a massive 40% (Chart 1).

We think the immediate problem was transparency. SMCI departed from recent practice by not providing a preliminary revenue number before it releases earnings on 30 April. Markets took that as indication of softer-than-expected revenues.

The SMCI (lack of) news prompted concerns NVDA might not deliver on hoped-for chip shipments and revenues.

NFLX delivered stellar results but also said it will not disclose subscriber numbers going forward.

Transparency? Or Something More?

Despite last week’s selloff, we do not see the broader market in trouble as not all the news was bad.

With about 15% of the S&P 500 (SPX) having reported, earnings beats are about 9% above consensus. Granted, it is early and the bar is low – earnings are projected to be up only 3% YoY.
An ETF of large cap growth stocks (RPG) fell 5.7% last week – but its value counterpart (RPV) gained 1% on the week and 2.5% off the low as the tech selloff accelerated (Chart 2).

Further, the Fed may be on hold longer than people thought a few weeks and months ago – but we see zero likelihood it will raise rates unless there is a major resurgence in inflation.

And the economy and labour market appear robust despite relatively high rates. While Fedspeak today is focused on inflation now, we suspect the Fed will pivot to rate cuts if the recovery seems at risk of stalling.

Semiconductor Pain Creates an Opening

Most of the pain was in the semiconductor sector. The Philadelphia Semiconductor Index (SOX) was down 9.2%. Apart from the AI-related names, the press mentioned China might try massively increasing exports of commodity type chips, as well as US restrictions on exporting advanced AI chips to China – both of which could hurt US chip producers. And Taiwan Semiconductor Manufacturing Co. (TSMC) warned demand for chips might weaken in 2024 – but this was largely due to smartphones.

We have frequently highlighted that companies producing commodity-type chips (think Texas Instruments (TXN) and Intel (INTC)) still face weak demand as they wait for industrial companies to run down high inventories.

Companies producing AI-related chips operate in another universe. It remains to be seen just how AI will transform industry and society, and whether software companies can monetize whatever happens. But the need for AI processing will only expand geometrically for the foreseeable future.

We see last week’s selloff as a rare opportunity to gain exposure to leaders in the AI hardware sector.

The Week Ahead

Earnings season takes off with some 265 companies in our Russell 1000 universe slated to report. The stars are major tech giants, including Meta (META), Alphabet (GOOG), Tesla (TSLA), and Microsoft (MSFT). They will do much to validate or dispel the gloom of last week’s tech selloff.

Ford (F) and General Motors (GM) will be closely watched for their plans around EVs. PepsiCo (PEP) and cruise operator Royal Caribbean (RCL) will report on very different slices of consumer spending. And Caterpillar (CAT) is the bellwether for US and global construction activity.

Adding to the mix are key economic reports on housing, GDP, and PCE inflation.

Key earnings reports by day: