Fed commentary could give a further shot in the arm to AI names that have been market leaders, but the broader semiconductor sector still faces challenges and skepticism
The chip trade was back in full force Thursday, with the sector posting one of its best days of the year on the heels of the Federal Reserve's interest-rate announcement, which brought a larger initial cut than some were expecting.
The Fed's decision to lower interest rates by 50 basis points "was the missing piece in the puzzle that we believe many investors were waiting for to signal the green light is back on for the tech growth trade into year-end and 2025," Wedbush analyst Dan Ives wrote in a note to clients Thursday.
Investors saw big moves in the PHLX Semiconductor Index, which itself posted its eighth-best day of the year Thursday, up 4.3%, even after paring gains late in the session. All components ended in positive territory, with shares of Nvidia Corp. $(NVDA)$ rising nearly 4%, shares of Advanced Micro Devices Inc. $(AMD)$ gaining 5.7% and shares of Marvell Technology Inc. $(MRVL)$ posting a 4.7% climb.
The interest-rate move is just one catalyst that could drive further growth for the technology sector, according to Ives. "The Fed and Powell kicked off its aggressive rate-cutting cycle this week, macro soft landing remains the path and tech spending on AI remains a generational spending cycle just starting to hit the shores of the tech sector," he wrote.
Mizuho desk-based analyst Jordan Klein agreed that the latest move and commentary from the Fed "created more confidence in a soft-landing scenario," which he said could be interpreted positively for cyclical sectors like semiconductors. It also set up a "risk-on backdrop and that helps semis a lot as they have been market leaders" for much of 2024.
But there are still business challenges for many portions of the chip sector that have been dealing with negative cyclical trends.
Klein took a measured view of some aspects of the Fed-fueled rally, noting that short covering may have played a role in the magnitude of Thursday's moves. Hedge funds are "generally skeptical and cautious" on most areas of the semiconductor sector outside of "compute"-focused names, he told MarketWatch.
Truist analyst William Stein also highlighted that chip-sector dichotomy in a Friday report that recapped recent meetings with semiconductor and AI players.
"The companies we visited exposed to AI made one thing clear - AI demand and spending is persistent, and in some cases accelerating," he wrote. Companies "noted that demand for AI compute is outpacing availability."
But those hoping for a rebound elsewhere in the semiconductor sector may be left wanting. "As strong as AI demand is, the long-awaited demand recovery in the diversified end market semis remains in limbo," Stein wrote. He met with executives at Microchip Technology Inc. $(MCHP)$ and Diodes Inc. $(DIOD)$, who indicated "elevated inventory, a slow inventory burn through under-shipping end demand and foggy end-market visibility."
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