Is the 'spring' for chip stocks over? With first-quarter earnings projected to decline, can conditions improve in the second half of the year?

Chip stocks posted strong performance in the first quarter of the U.S. equity market, with the technology sector leading gains—particularly semiconductor stocks. The Philadelphia Semiconductor Index rose 20.8% cumulatively during the quarter. Notable individual performers included Xilinx (NASDAQ: XLNX) (+48.9%), Advanced Micro Devices (NASDAQ: AMD) (+38.2%), and NVIDIA (NASDAQ: NVDA) (+34.5%). Declining investor sentiment toward chip stocks However, recent developments suggest a turning point for chip stocks. Although the Philadelphia Semiconductor Index has still gained over 5% this month, market sentiment appears to be cooling. Credit Suisse recently downgraded its overall rating for the semiconductor industry from “overweight” to “neutral,” citing analysts’ view that the sector’s current P/E ratio is already elevated. Beyond elevated valuations, investors should also note that upcoming first-quarter earnings reports may deliver a blow to bullish sentiment. Weak earnings in the semiconductor sector are expected to drag down overall technology sector profits by roughly 10% year-on-year. According to Wall Street forecasts, chip companies’ first-quarter results are expected to be dismal. Data from Refinitiv even indicates that semiconductor industry earnings are projected to plunge more than 20% in Q1. Data shows chip companies’ profits are expected to fall 16.5% in Q1, then further decline by 20.8% and 18.4% in Q2 and Q3, respectively. According to Refinitiv, semiconductor equipment firms are projected to see profits drop 36.4% in Q1, with a similarly steep decline anticipated in Q2. By Q4, the profit decline is expected to narrow to around 4%. Meanwhile, TSMC—the world’s largest semiconductor foundry—recently released disappointing financial results. Its Q1 revenue fell more than 10% year-on-year: consolidated sales totaled NT$218.7 billion (approximately USD $7.1 billion), down 11.8% year-on-year and 24.5% sequentially—though in line with the company’s own expectations. TSMC will hold an investor conference on April 18 to discuss Q1 results and provide guidance for Q2. However, the company has already dubbed 2019 “a sluggish year” for both its own operations and the broader semiconductor market—citing macroeconomic uncertainty and disappointing high-end smartphone sales, which have led to inventory buildup across the supply chain. TSMC’s results have deepened concerns across the semiconductor industry. Analyst Art Hogan noted that some previously favored chip stocks—including Micron Technology and NVIDIA—are now showing signs of deterioration, intensifying uncertainty within the sector and likely triggering greater volatility ahead. Why worry about semiconductor earnings? Concerns about semiconductor earnings stem primarily from weak end-demand, resulting in excess idle inventory.

[Anton Gold] Previewing the U.S. earnings season: Will profit growth hit a near two-year low? Where do opportunities lie in the second half?

According to reports, following a period from 2018 to 2020 during which tens of thousands of employees were hired to handle the surge in mortgage origination and refinancing activity driven by low interest rates, several major institutions—including JPMorgan Chase and Wells Fargo—are now scaling back their mortgage departments. “We’ll see significant layoffs over the next one or two months,” said Doug Duncan, Chief Economist at Fannie Mae. “It typically takes about six months from a shift in market conditions to actual layoffs.” Meanwhile, investment banking activity remains sluggish. According to Dealogic, global equity capital markets IPO volume declined nearly 69% year-on-year in the first half, falling to USD $263.8 billion. M&A activity shrank in Q2, with deal value down 25.5% year-on-year to USD $1 trillion. Kenneth Leon, Head of Equity Research at CFRA Research, stated: “We’ve seen M&A activity stall, and market confidence has approached a historic low. At the same time, generating higher fees from IPOs has become extremely difficult.” Externally, close attention is also being paid to major banks’ assessments of economic health. Last month, Jamie Dimon, CEO of JPMorgan Chase, warned of preparing for an “economic hurricane” triggered by Federal Reserve tightening and the Ukraine conflict. James Gorman, CEO of Morgan Stanley, estimated the probability of a recession at 50%. Overall earnings growth to slow Refinitiv data shows that earnings expectations are deteriorating across five of the 11 sectors. Upstream and midstream cyclical sectors—including energy, industrials, and materials—will continue their high-activity trajectory, while consumer discretionary, communications, and utilities face pressure from weakening demand and rising costs. Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, issued a report noting that the recent ratio of new manufacturing orders to inventories has been declining. Historically, this trend bodes poorly for corporate earnings expectations. “Although valuations have pulled back, corporate earnings must recalibrate to a new regime characterized by rising capital costs and heightened inflation. We await Q2 and Q3 earnings guidance, which may serve as a near-term headwind for equities. Even if commodity and supply-chain pressures gradually ease, the pace of overall inflation decline may remain slow—and far from fully under control.” Yicai reporters observed that numerous companies have recently issued earnings outlook warnings. Micron Technology expects revenue to decline this quarter, fueling concerns about semiconductor demand. Meta Platforms CEO Mark Zuckerberg recently told employees that, amid slowing user growth and advertising revenue, “Meta is facing one of the most severe economic downturns in its recent history.” At the same time, companies face resistance when attempting to pass on higher raw material and labor costs to customers. Jeff Harmening, CEO of General Mills, recently noted that higher prices are prompting consumers to forgo dining out and instead cook at home. “As consumers grow increasingly attuned to economic realities, the first thing they tend to do is eat at home—where they can enjoy more generous meals.”

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