Chips, Broader Market Up Early on Peace Talk Hopes

By Joe Mazzola

Crude oil wobbled and major indexes climbed to start the week after Iran said it might be willing to pursue diplomacy, The Wall Street Journal reported. Early gains after a weekend of Middle East escalation included chip stocks approaching a host of earnings that could help set direction for the struggling sector.

"Technically, we're oversold in the Nasdaq-100^® and the PHLX Semiconductor Index (SOX), so it wouldn’t surprise me to see some mean reversion at some point this week, especially if Alphabet announces strong, or increased, CapEx guidance," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR), writing in Schwab's Weekly Trader's Outlook.

Wall Street cratered Friday and sector action was dismal, with only energy up as oil price fears gripped the market and fighting escalated with nine straight days of U.S. strikes. Major indexes fell across the board last week, though Treasury yields eased slightly. The Federal Reserve enters its quiet period ahead of next week's meeting. As of early today, chances of a rate pause are 88%, according to the CME FedWatch Tool. "We expect the Fed to remain on hold for the next handful of meetings," said Collin Martin, head of fixed income research and strategy at SCFR.

Three things to watch

South Korea's volatility reverberates in U.S. chip sector: South Korea's major index has become "effectively a barometer for the AI trade," said Michelle Gibley, director of international equity research and strategy at SCFR. She cited issues including the position that memory chips have as a bottleneck in the AI supply chain, explosive growth in profits, the large market cap of companies domiciled there, and growth of leveraged single stock ETFs. South Korea tried to reduce the influence of leveraged ETFs, halting new listings last week to cool what Bloomberg called a "trading frenzy." South Korea's rate hike last week also hurt stocks there and weakness traveled across the Pacific, reinforcing how global developments can play out here. Stocks in South Korea slumped again to start the week as Samsung reportedly cut jobs, CNBC reported. Another weight on chips and tech in general is muscle memory. Market participants have frequently punished hyperscalers at earnings time for swollen spending forecasts and taking on new debt, also contributing to recent frayed nerves on Wall Street. Alphabet (GOOGL) and Intel are the next guideposts later this week after investors punished ASML (ASML) and Taiwan Semiconductor Manufacturing (TSM) last week despite strong results and guidance.
Key chip firms don't factor into S&P 500 earnings growth: Second quarter S&P 500 earnings per share for the approximately 10% of S&P 500 firms that had reported through Friday grew an eye-popping 52%, and that figure didn't even include TSM or ASML. Neither is a member of the S&P 500, which might surprise those reading regularly about these two chip industry giants and their heavy influence on U.S. markets. Both companies are American Depositary Receipt (ADR) firms, which offer U.S. investors a chance to include international stocks in their portfolios. They are negotiable securities but don't represent direct ownership in a company. Instead, they're certificates issued by a U.S. bank corresponding to shares of a non-U.S. company. ADRs of TSM trade on the New York Stock Exchange. ASML's ADR trades on the Nasdaq. "These stocks are not impacting your SPY or S&P 500 fund, but obviously, if ASML or TSM are moving big one way or the other, that's going to affect the chip companies in the S&P 500 since they typically trade as a cohort," Peterson said.
Leading indicators, TIPS auction ahead: Treasury note yields eased last week but remain elevated. June leading indicators today and S&P Global manufacturing updates later this week are among coming reports that could move the bond market. The leading indicators index "hasn't done a very good job giving a heads-up as to the direction for the economy," said Liz Ann Sonders, chief investment strategist at SCFR, in Friday's OnInvesting podcast. "It's kind of flashed recession for a few years now, but interestingly it just started to tick a little bit higher. So I'll be looking to see whether that improving trend has legs." Another element this week is a 10-year Treasury Inflation Protected Securities (TIPS) auction, which could hint at how much demand there is for inflation protection.

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