Chip selloff drags global equities lower on perfection premium
A global semiconductor selloff drove major equity indexes lower on Thursday as investors proved that even blockbuster earnings are no longer enough to satisfy markets pricing artificial intelligence stocks on perfection.
Global equity indexes fell on Thursday, led by a broad selloff in semiconductor stocks that dragged down major markets from Asia to Wall Street. The tech-driven declines came despite a solid start to the U.S. second-quarter earnings season and an escalation in Middle East hostilities.
Taiwan Semiconductor Manufacturing Company (TSMC) posted a higher-than-expected 77 percent jump in earnings. Rather than rewarding the results, investors dumped the stock and its peers across the globe. The Philadelphia semiconductor index tumbled 4.3 percent for its second consecutive daily loss, while South Korea's technology-heavy KOSPI plunged more than 6 percent and Japan's Nikkei dropped nearly 3 percent.
"That tells you the AI trade isn't being priced on growth anymore. It's being priced on perfection. Any earnings report that's merely great, instead of flawless, gets sold," said Gene Goldman, chief investment officer at Cetera.
The sheer weight of the chip sector pulled the Nasdaq Composite down 1.5 percent to 25,881.95. The S&P 500 fell 0.5 percent to 7,533.77, and the Dow Jones Industrial Average slipped 0.2 percent to 52,552.97. MSCI's global stock gauge declined 0.6 percent to 1,121.65, though Europe's STOXX 600 managed to close slightly higher, up 0.16 percent.
Earnings bar raised
Broadly, U.S. corporate earnings are improving. Analyst expectations for second-quarter earnings growth increased to 24.8 percent this week, up from 23.7 percent, according to LSEG. However, sustained market gains remain difficult to achieve when valuations already reflect unbridled optimism.
"When you've a lot of optimism in the market you need everything to go right. Any piece of negative news can throw the market off," said Tony Welch, chief investment officer at SignatureFD. "There's a lot of confidence built in right now. It's not a bad thing in itself but it does create a high hurdle for market prices to keep going higher."
Geopolitics fail to lift oil
Outside of equities, the U.S. dollar and Treasury yields climbed as investors reacted to fresh economic data and deepening geopolitical tensions. The United States and Iran exchanged fire, effectively ending a recent truce and raising the stakes for critical maritime chokepoints. Iran signaled it might push Houthi allies to close the Bab al-Mandeb Strait, adding to the threat of disruption in the Strait of Hormuz.
Despite the direct clash between the two nations and the risk to two key oil routes, crude prices eased. U.S. crude settled down 65 cents to $78.95 a barrel, while Brent fell 72 cents to $84.23.
