Thursday marked a challenging day for much of the tech sector, particularly semiconductors. The popular Philadelphia Semiconductor Index (SOX) dropped 350 basis points, with well-owned and favored stocks falling 4-6% without any significant events.
"No incremental and new negative newsflow or data points on the fundamental side of the equation to create a rush for the exits,” analysts at Mizuho commented.
“That is the good part," they added.
Mizuho believes that the market experienced a rotation into rate-sensitive winners as the lower consumer price index (CPI) report fueled speculation that the Federal Reserve might cut rates as early as September.
While active fund managers may not have been in a hurry to sell Big Cap Tech and Semiconductor Winners to invest in housing, biotech, utilities, real estate, small caps, and REIT stocks, quantitative and passive strategies were likely taking that action.
The bigger question that now looms, according to analysts at Mizuho, is the impact of the upcoming PPI data release at 8:30 am ET. If it comes in weaker, it might trigger further rotation out of semiconductors and tech.
Analysts believe that the Thursday sell-off was a "wake-up call", signaling it might be time to start taking profits in major tech and semiconductor AI winners. The past week saw significant gains in these stocks without any new developments.
"It just did not seem healthy to me, as valuations just go higher ahead of earnings season to come 2H July. The big and fast rotation out of Software and into Semis this week only made yesterday more painful," analysts continued.
The broader sell-off and rotation out of semiconductors yesterday could be a preview of what's to come when Nvidia (NASDAQ:NVDA) eventually guides only “inline” or misses expectations.
"Yes, that day will eventually happen. Trust me on that. No clue how soon and what quarter. Not likely in CY24, or even early CY25 in my view,” analysts at Mizuho added.
“But it does happen, and the broad sell-off and rotation OUT OF SEMIS yesterday was a quick sneak preview. Think ‘no place to hide’ when an unwind starts. All semis will go lower."
The meltdown in semiconductor equipment stocks, such as Applied Materials (NASDAQ:AMAT), KLA Corp (KLAC), and Lam Research (NASDAQ:LRCX), which dropped 450-600 basis points without bouncing back, exemplified the potential for an eventual semiconductor market unwind.
These stocks, heavily owned by AI winner baskets and non-tech generalist investors viewing them as “picks and shovels of AI expansion,” were sold off quickly.
“So when those funds or momentum strategies see a potential break-down or rotation, they sell first, ask questions later,” analysts at Mizuho noted.
They speculate that the NVDA and AI semiconductor unwind might occur when major cloud hyperscalers discuss moderating their capex investment growth, rather than cutting it. Although they do not anticipate this happening through CY25, they caution that if investors begin to worry that 2025 or 2026 calendar years could represent a short-term peak, many will likely sell before any actual signals emerge.