Global equities fall as chip selloff exposes AI perfection pricing
A global selloff in semiconductor stocks dragged equities lower on Thursday as investors demanded flawless results from AI-linked companies amid rising geopolitical and macroeconomic headwinds.
Equity markets worldwide declined on Thursday as a broad retreat in semiconductor stocks offset a strong start to the U.S. earnings season. The selloff coincided with rising U.S. Treasury yields and a stronger dollar following fresh economic data, while escalating military conflict between the United States and Iran added to risk aversion.
The technology sector bore the brunt of the selling pressure. Taiwanese chip giant TSMC posted a better-than-expected 77% surge in earnings, but investors still offloaded the stock. The Philadelphia semiconductor index dropped 4.3% for its second consecutive daily decline. Selling was severe in Asia, with South Korea's technology-heavy KOSPI plunging more than 6% and Japan's Nikkei shedding nearly 3%.
The harsh reaction to TSMC underscores how demanding the market has become for artificial intelligence-related equities. "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.
Overall U.S. corporate earnings are shaping up well. Analyst expectations for second-quarter earnings growth rose to 24.8% on Wednesday, up from 23.7% a week earlier, according to LSEG. However, elevated baseline expectations leave little room for error. "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."
Geopolitical risks simmered in the background as Washington and Tehran exchanged fire, effectively ending a recent truce. Iran indicated it might push Houthi allies to shut the Bab al-Mandeb Strait, a critical Red Sea shipping lane, adding to existing tensions over the Strait of Hormuz. Despite the escalation, crude oil futures eased. U.S. crude fell 65 cents to $78.95 a barrel, while Brent dropped 72 cents to $84.23.
The MSCI global stock index fell 0.6% to 1,121.65. Wall Street closed lower, with the Nasdaq Composite losing 1.5% to 25,881.95, the S&P 500 declining 0.5% to 7,533.77, and the Dow Jones Industrial Average slipping 0.2% to 52,552.97. The pan-European STOXX 600 was a rare outlier, closing up 0.16%.
