Over the past two months, the most prominent trading themes in the stock market—aside from the ongoing conflict involving Iran—have been the seemingly relentless rise of semiconductor stocks and the continued severe underperformance of software shares amid fears of AI-driven disruption. Just two weeks ago, software stocks recorded their largest two-day decline relative to semiconductor stocks in history. Following an eight-day consecutive rally and strong rebound in software shares over the past two weeks—which many believed might indicate a potential bottom for the sector—Goldman Sachs issued its most explicit defense of the software sector to date. However, the previous trend has recently resurfaced:
Semiconductor stocks have achieved an unprecedented 17 consecutive days of gains, with the SOX ETF surpassing 10,000 points for the first time, reaching historically extreme overbought levels. Meanwhile, the software ETF IGV plunged 5%, triggered by disappointing earnings guidance from ServiceNow, which saw its shares drop as much as 18% intraday. The software/semiconductor paired basket fell 8%, marking one of the largest declines on record.
In response, Goldman Sachs TMT specialist Peter Callahan noted in Thursday's morning briefing: "There is considerable noteworthy activity at the micro level within the TMT space, which appears poised to drive renewed outperformance of semiconductors relative to software." The most frequently asked questions by Goldman Sachs clients on Wednesday included:
Why did Micron Technology (MU) surge 9%? Is it purely catch-up momentum? How to interpret the 4-6% declines in Booking/Expedia? The coordinated rise within the semiconductor ecosystem (Broadcom +5%, Marvell +4%) Earnings outlook for large-cap tech stocks (Are market expectations already too high?)
Key Data Points Highlighted by Goldman Sachs Software & Services:
Earnings results were mixed, but stock price movements were highly uniform (downward), at least initially during the trading session. ServiceNow: Market debate centers on whether its organic growth momentum aligns with industry enthusiasm for AI. IBM: Q1 software revenue growth decelerated by approximately 3 percentage points quarter-over-quarter. INFY: Full-year revenue guidance of +1.5% to +3.5% fell about 5% below market expectations. HCL Tech: Declined roughly 11% earlier this week due to a soft outlook.
Regarding ServiceNow, Callahan admitted:
"I previously found the pre-earnings positioning attractive (especially with the NOW Knowledge conference approaching), but the market clearly disagreed. This feels reminiscent of the Q4 earnings season dynamic (selling off short-term EPS data points as longer-term uncertainties remain unresolved), coupled with ongoing debate about NOW's organic growth momentum (e.g., Q2 implied organic cRPO growth around 17.25% year-over-year)." Goldman Sachs Research maintains a Buy rating, identifying multiple catalysts over the next six months, including maturation of its product portfolio, increased customer engagement willingness, and a clearer path to GAAP profitability (GS Research estimates EPS exceeding $9 by 2030).
As market attention shifts to SAP's earnings, Callahan distilled several "macro software insights":
M&A activity (particularly tuck-in acquisitions to accelerate AI capabilities) may only obscure margin and revenue narratives. Q1 is seasonally weak, and Q2 faces tougher comparables (industry-wide year-over-year difficulty increases by about 2 percentage points). Macro uncertainty and Middle East tensions remain disruptive. AI pricing and product packaging are still undergoing adjustments.
Semiconductor Cycle:
Texas Instruments (TXN) continues to see acceleration in its industrial business (year-over-year growth exceeding 30%), with management noting broader-based industrial signals this time and strong data center momentum (up approximately 90% year-over-year). Notably, if TXN's June quarter revenue guidance high-end (quarter-over-quarter growth of +4% to +12%) is achieved, it would represent the largest June quarter sequential growth since the financial crisis—bulls argue that repricing towards data centers and business mix transformation are beginning to pay off. Additionally, STMicroelectronics (STMicro) rose 7% in European trading, guiding for a median June quarter revenue increase of +12% sequentially, citing improving demand, strong orders, and inventory normalization. Analog semiconductors had been one of the few remaining contested areas within the semiconductor space; focus is on whether the segment can extend gains post-earnings beats (referencing Renesas Electronics' 7% rise in Japanese trading yesterday). Elsewhere: Dover (DOV) reported order acceleration, and ABB's electrification orders grew +44% year-over-year (versus market expectations of +13%).
AI Infrastructure:
Semiconductor equipment (Lam Research guiding significantly above expectations, +1%) and memory (SK Hynix reporting a substantial earnings beat but shares flat) indicate underlying fundamentals remain robust, though some "sell the news" sentiment persists (similar to post-earnings moves seen with ASML or TSMC). Regarding the earnings outlook for AI infrastructure, while near-term expectation hurdles are indeed high, the sector appears to have dip-buying support, with market confidence in the "token economy" continuing to solidify—evidenced by Google's update on Wednesday. Ultimately, earnings results are just one of many important data points; model updates, ARR progress, and supply chain dynamics are equally critical to monitor.
Consumer Sector Dynamics:
US discretionary consumer stocks underperformed the broader market by 200 basis points on Wednesday, with the retail sector lagging by 230 basis points, for reasons not entirely clear (several minor factors could be cited). Investor sentiment is shifting towards pessimism (despite core discretionary consumer Q1 earnings likely being quite solid overall). Key current debates and bearish narratives include: fading tax refund season benefits, Easter timing displacement (later this year), oil price pressures, and ongoing concerns about credit conditions.
Important Charts Semiconductor "Super Cycle": The SOX index has risen for 16 consecutive trading days, the longest such streak since data began in 1994, and achieved a 17th day of gains on Thursday.
The SOX's 14-day RSI closed around 80.5 on Wednesday, reaching levels seen only a few times in the past decade (Autumn 2025, December 2021, January 2021, Q4 2017).
The Information Technology sector now comprises approximately 35% of the S&P 500's market capitalization (a level first reached last autumn), its highest weighting since the dot-com bubble era—though their contribution to earnings today is vastly different compared to the 2000 period.
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