Chips Lead Way, Bouncing Back After Recent Swoon

By Joe Mazzola

The big question as earnings season looms is whether rotation out of semiconductors that took a 3% bite out of that sub-sector last week continues. Small caps were the beneficiary and had their best first half since 1991, according to Barron's, while the broader market remains just below record highs and crude oil weakens. Early today, chips made a comeback, leading indexes to fresh gains.

"The sentiment around the AI trade feels a little sour at this point, but it's possible that the recent weakness is just wringing out the excess in the market and balancing what used to be lopsided positioning in the space," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR), in his Weekly Trader's Outlook. "Outside of the AI theme, the broadening of the rally still appears to be underway, as the economic data and growth forecasts remain strong." Second quarter S&P 500 earnings growth is seen at 23.3% year over year, according to FactSet.

Stocks had a mixed pre-holiday session Thursday, with chips still under pressure but the Dow Jones Industrial Average jumping nearly 600 points to a record high. The weak jobs report was widely seen taking pressure off the Federal Reserve to hike rates and lifted most sectors early Thursday. But rotation soon took over. That meant a bloodbath for semiconductor stocks, as investors shifted into defensive sectors such as health care, consumer staples, and utilities—the three S&P 500 sectors that gained the most Thursday. Seven of the S&P 500's 11 sectors rose, though the index finished flat.

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