TSMC posted fifth straight quarter of record profits. Profit up 77%. Chip stocks sold off anyway. That gap between fundamentals and price action is the story of the week in tech.
Another Down Day for Nasdaq and Tech Stocks
Nasdaq fell 1.5% Thursday. S&P 500 lost 0.5%. Dow dropped 105 points or 0.2%. Third significant down day for tech in the past week.
PHLX Semiconductor Index dropped 4.3%. Nvidia, Broadcom, AMD, Intel, Micron, Sandisk, and Seagate all finished lower. Broad based selling across chip names regardless of company specific news.
This is the pattern that has been running for weeks now. Chip stocks rally briefly then get sold. Each recovery attempt gets cut short. Hedge funds are quietly reducing exposure according to Goldman Sachs prime brokerage data. Aggregate net positioning in the AI basket has fallen to the lowest level this year. Professional money is trimming not adding.
TSMC Earnings Beat Expectations but Investors Still Sold
TSMC reported fifth straight quarter of record earnings Thursday. Profit surged 77% year over year. Extraordinary result from the world’s most important semiconductor manufacturer.
Stock sold off anyway.
Same dynamic as Samsung last week. Report massive profit growth. Watch the stock fall. When strong fundamentals cannot stop selling it tells you the problem is valuation not the business. Investors are not questioning whether chip companies are making money. They are questioning whether stocks that ran up 200% to 700% over the past year are worth holding at those prices even with good earnings.
TSMC at five straight record quarters is an excellent business. Whether it is priced correctly after the AI rally is a different question and right now the market is answering that question by selling.
South Korea Tightens Rules on Semiconductor ETFs
South Korea added a regulatory response to the volatility this week. Authorities tightened rules on leveraged chip ETFs after wild swings in SK Hynix and Samsung shares. Leveraged ETFs amplify daily moves. In a week where Kospi was falling 8% to 9% in single sessions the leveraged products were moving 15% to 20% in one day. Regulators decided that needed to be reined in.
Restriction on leveraged products reduces one source of amplified selling but does not fix the underlying valuation concern. Less volatility in the swings does not mean the direction changes.
Retail Sales Show Slower Consumer Spending
Retail sales rose 0.2% in June. Cooling from May’s 1% increase. Not alarming but shows consumer spending momentum is slowing somewhat.
Slower spending can be read two ways. Inflation concern going down because consumers are pulling back. Or economic growth concern going up because consumers are spending less. Thursday’s market reaction suggested the latter interpretation was winning.
Nothing in the retail data that would move markets dramatically in either direction. Just background noise in a week dominated by chip selling and earnings reactions.
Netflix Adds to Weak Nasdaq Sentiment
Netflix dropped more than 9% after hours Thursday after results that were basically in line with expectations. One cent earnings beat. Tiny revenue miss. Soft guidance for Q3. Announced it will report viewer engagement data less frequently going forward.
None of those things are catastrophic individually. Together they created a post earnings reaction that will weigh on sentiment heading into Friday. Netflix is not a chip company but a 9% after hours drop from a major Nasdaq component adds to the overall cautious mood.
Nasdaq Futures Point Lower Heading Into Friday
Dow futures fell roughly 300 points heading into Friday. S&P 500 futures down 0.7%. Nasdaq futures off about 1%. Pre-market pointing to another losing session before the week ends.
Week is on track to finish in the red across all three major indexes. Earnings season is barely started and the market’s tolerance for anything less than exceptional results is very low right now. IBM down 25%. Netflix down 9% after hours. TSMC with record earnings and still selling off.
Good enough is not good enough when stocks are priced at premium valuations. Every company reporting over the next three weeks is going to face that same reality. Numbers need to exceed expectations clearly or the reaction will look more like this week than like the bank earnings that beat and moved higher.