Veteran Wall Street strategist Mike Wilson weighs possibility that semiconductors are merely 'the latest commodity to boom this year'
The Nasdaq Composite has just registered a five-day losing streak, its longest such retreat since the start of the year, shedding 4.6% of its value in the process.
The tech-heavy index's fall is more than double that of the broader S&P 500 SPX over the same period, and that speaks to two things: caution over the artificial-intelligence trade and a broadening of the market as investors shift funds into sectors deemed more economy-sensitive.
Many investors in recent years have benefited handsomely from buying such a tech dip. But they may need to be much more selective this time, according to a team of strategists at Morgan Stanley led by Mike Wilson.
That's partly because he thinks the broadening trade has further to run, "driven by an underappreciated recovery in earnings across the market."
He favors discretionary goods, transports and regional banks, amid falling oil prices and the likelihood that the Federal Reserve will be less hawkish than the market currently thinks.
But another concern for Wilson is that recent volatility in semiconductors "is making historically high exposure levels in the space harder to maintain."
As an illustration of that volatility, the PHLX Semiconductor Index SOX lost 7.9% last week, having jumped 7.3% the week before that.
Wilson points to weakness in shares of hyperscalers of late and heightened earnings optimism as headwinds for the semiconductor group.
"In our view, this rotation away from the hyperscalers may be a leading indication that semis (key spending beneficiaries [of hyperscalers]) could now see a period of underperformance as earnings per share revisions breadth for the space comes up against historical extremes," says Wilson.
And he also sees semis as possibly "the latest commodity to boom this year," drawing what for bulls may be a worrying comparison to the performance of silver stocks - though with a four-month lag.
"If the broadening out is making a sustainable comeback, this price momentum in semis stocks likely needs to reach a climax, and it appears that may be happening, on schedule," Wilson says.
"This doesn't mean the cycle [for semiconductors] is over ... though a lack of price momentum in the space for now is likely to give other areas of the market room to outperform as relative tailwinds drive groups like discretionary and transports," he concludes.
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