Semiconductor stocks on Friday took a beating after a grim profit warning from Idaho-based Micron Technology Inc sparked fresh worries about the US’ earnings power as the country is potentially heading for a recession.
Despite a broader stock market rally, the Philadelphia Stock Exchange Semiconductor Index dropped 3.8 percent after Micron, the largest maker of memory semiconductors in the US, flagged that demand was cooling for chips used in computers and smartphones.
The index — which is home to US chip giants Advanced Micro Devices Inc and Nvidia Corp, as well as Micron — is down 38 percent this year.
Photo courtesy of Micron Technology Taiwan Inc
Historically, semiconductor stocks have been a key barometer for the broader stock market and economy. Chips are used in a broad range of industries that are important for growth: appliances, data centers, gaming and artificial intelligence.
If conditions are weak for chips, it raises questions about demand in other segments of the economy, which is a troubling harbinger for the stock market, said Matt Maley, a senior strategist at Miller Tabak + Co.
“We had nowhere near enough chips, and now the demand is falling,” Maley said. “What signal does it send? It highlights a growing concern that the slowdown we’re going through will turn into a recession.”
The semiconductor shortage, driven by factors on the demand and supply sides, has eased somewhat, but there is still limited production for certain chips used in vehicles and home appliances. Troubling reports from semiconductor companies ahead of their second-quarter earnings are spurring fears that demand would exceed supply for even longer.
“What this weakness indicates is that the economy is slowing, and there’s potential for a recession,” said Tim Ghriskey, a senior portfolio strategist at Ingalls & Snyder LLC. “Semis are a red flag because they’re really in everything. They’re so integral to everything that’s sold today. They’re the most rudimentary equipment, so this is a major negative for the economy.”
Fears of an impending global recession and rising levels of inflation are forcing consumers and businesses to rein in spending.
Worldwide PC shipments are on pace to decline 9.5 percent this year, research firm Gartner Inc said.
“The second half of the year is off to a rather inauspicious start following downbeat commentary from Micron, which had negative implications for smartphones, data centers and overall demand for consumer discretionary goods,” said Jim Dixon, a senior equity sales trader at Mirabaud Securities. “The disappointing guidance might be the prelude to an earnings recession.”
Adding to woes was a Digitimes Asia report that the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), has seen its major clients cut their chip orders for the rest of this year.
Shares of TSMC dropped 4.73 percent on Friday and have fallen about 26.26 percent so far this year.
After several years flying high as Asia’s best Nvidia Corp proxy, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) is increasingly vying with other artificial intelligence (AI) stocks for investor attention. Stock traders are chasing a wider array of beneficiaries as mainstream usage of AI creates demand for hardware beyond the most-advanced chips TSMC makes for Nvidia. Subthemes from the deepening memory crunch to advances in robotics are also luring bids. At the same time, investment caps on single stocks are pushing funds to diversify, while retail investors long familiar with TSMC through its US depositary receipts are being offered a broader set of
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