What Is Behind the Current Chip Correction Move?
Dutch-rooted lithographic equipment maker ASML has kicked off a corrective wave of decline in European and Asian markets on July 17, which quickly echoed in the chip segment on Wall Street as well. The EU technology sub-index dropped by 4.5% marking the most substantial one-time fall for the last 18 months and the U.S. tech-heavy Nasdaq Composite index plummeted by 2.75% to challenge the area below 18,000 technical support, which was an all-time resistance level before July. American Depositary Receipts (ADRs) of ASML suddenly shed almost 12% of its market value, sparking concerns of a massive rotation away from tech stocks to industrials and smaller caps.
It was amazing that the Dow Jones index (DJIA) closed above 41,000 for the first time ever (228 points, or 0.6%, of daily rise) at the very moment when the broader S&P 500 and its AI-related flagships including NVIDIA lost their upside steam. This fact emphasizes the reallocation of money, and not the outflow from equities to the cash, as it happens in times of crisis or stock crashes. Nominally, ASML posted quite decent second quarter figures on both equity per share (EPS) of $4.01 ($0.02 better than consensus forecast) and somewhat lower revenue of $6.24 billion vs the average expectations of $6.49 billion. Yet, the weak point by this giant chip-making equipment manufacturer was its disappointing forward guidance, with supposed Q3 sales between $6.70 billion and $7.30 billion, compared to higher Wall Street expert pool estimates of $8.32 billion. At the same time, ASML's stock price was clearly overheated after rallying nearly 25% during the recent three months, and now it only returned to its levels of late May. Thus, downstairs sliding is fast, but it's not a disaster yet.
A double-digit drop in ASML shares could go rather smoothly for other AI leaders, if not the synchronous news came from U.S. government sources, as whistleblowers said regulators might consider more severe trade restrictions in order to suppress China's access to advanced chip know-hows. If firms such as ASML, NVIDIA and AMD continue to send advanced semiconductor decisions to Asian markets, the White House subordinates may impose a measure called FDPR (the foreign direct product rule) to control on foreign-made products, which use even the tiniest amount of U.S.-licensed technology.
This kind of threat could be how the U.S. wants to push European and Japanese companies to restrict their contacts with Chinese firms, and the spectre of a trade war is here again, inside investing minds. Again, the sectoral leaders like NVIDIA and AMD have already learned to bypass most of the former restrictions. However, in combination with moderate demand concerns and covering a big distance in a short time by hyping AI stocks, this prompted an immediate profit taking, so that NVIDIA and Micron (MU) lost nearly 6.5%, Broadcom (AVGO) dropped by 8%, while AMD corrected by more than 10% in one trading session.
Further price developments in the nearest couple of days will show how deep the correction may go, but the major fundamental conception suggests that too rapid decline is typically temporary and short-lived on such an advanced stage of the lasting uptrend, as it has the solid AI-related nature.
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