Key facts
- Chipmakers are expected to contribute significantly to S&P 500 profit growth in the second quarter.
- The PHLX Semiconductor index is up 65% year-to-date but has fallen 18% in July.
- Taiwan Semiconductor Manufacturing and Samsung Electronics saw their shares decline despite strong earnings reports.
- Leveraged ETFs and retail investor option activity are contributing to stock volatility in the semiconductor sector.
- Concerns exist about the sustainability of AI demand for chips and the potential for a market downturn.
Chipmakers are currently a focal point on Wall Street, with their shares exhibiting significant volatility throughout July. Investors are anticipating that a select group of these companies will drive nearly half of the S&P 500's profit growth for the second quarter. The PHLX Semiconductor index has seen substantial gains this year, but has recently experienced sharp declines, off 18% for July after numerous large daily swings. This volatility is fueled by worries about the sustainability of AI-driven chip demand and the impact of leveraged trading strategies. Despite strong earnings forecasts, with semiconductor companies expected to contribute 44% of overall S&P 500 earnings gains, market reactions to recent reports have been muted. Both Taiwan Semiconductor Manufacturing and Samsung Electronics saw their shares fall, even after reporting significant profit increases. Market watchers attribute some of the volatility to the popularity of these stocks among retail investors and the use of leveraged exchange-traded funds, which amplify market movements. South Korea's financial regulator has announced measures to curb volatility linked to single-stock leveraged ETFs, particularly those tied to chipmakers like Samsung Electronics and SK Hynix. While AI spending has boosted demand, concerns are rising that the optimism may be overheated, and any disappointing earnings outlook could lead to further market declines.