US semiconductor sector opened "black" in July, analysts say that some upward potential has been overdrawn, and future volatility may further intensify.

The U.S. semiconductor sector started off poorly in July, sparking concerns in the market about whether the AI trend can continue. Analysts believe that after experiencing a significant increase earlier this year, chip stocks are facing multiple challenges such as high valuation, the sustainability of AI capital spending growth, and slowing profit growth, which could further increase volatility in the sector in the future. Data shows that the Philadelphia Semiconductor Index has fallen by over 11% since reaching a historical high in June, but is still up by around 83% year-to-date. Steve Sosnick, Chief Market Analyst at Interactive Brokers, stated that the semiconductor industry has achieved unprecedented profit growth in recent years, but the market is more concerned about how long this growth can continue. The flow of funds has been volatile, with a divergence in AI investment enthusiasm among investors. LSEG Lipper data shows that in the week ending June 24th, U.S. semiconductor-themed funds saw a net outflow of approximately $11 billion, marking the largest weekly outflow since the turn of the century. However, in the two weeks prior, these funds recorded inflows of around $12 billion. Nevertheless, most institutions remain optimistic about the prospects of AI infrastructure investments. Bank of America Corp expects global cloud computing and AI infrastructure capital spending to reach nearly $1.5 trillion by 2027, representing a 40% to 50% increase year-on-year. Despite the increased short-term adjustments, several Wall Street institutions have raised their target prices for chip companies, believing that AI demand will continue to support industry profit growth. According to LSEG statistics, among S&P 500 semiconductor companies, Micron Technology, Inc. still has over 60% potential upside compared to the market consensus target price, making it the highest in the industry; storage chip manufacturer SanDisk has over 30% potential upside; and NVIDIA Corporation's target price for the next 12 months is over 40% higher than the current stock price. Recently, South Korean storage chip giant SK Hynix completed a $26.5 billion American depositary receipt (ADR) issuance and debuted on the Nasdaq, with its stock price rising by over 10% on the first day, reflecting the market's continued optimism about AI storage demand. However, analysts point out that the stock prices of many large chip companies such as AMD, Intel Corporation, and Marvell Technology, Inc. are close to the market consensus target price, indicating that the short to medium-term upside potential may be relatively limited. Alexander Lis, Chief Investment Officer at SD Ventures, stated that the continuous increase in target prices by brokerage firms reflects the strong previous rise of the semiconductor sector, but does not necessarily mean that there will still be the same level of upward potential in the future. Short positions hit a three-year high, with earnings reports facing critical tests Meanwhile, short funds have begun to reposition themselves in the semiconductor sector. Data analysis firm ORTEX shows that major chip stocks' short positions have reached the highest level in nearly three years, with the average short position size in the industry nearly doubling over the past three years. Marvell Technology, Inc., Micron, and Qualcomm saw the largest increases in short positions. Peter Hillerberg, Co-Founder of ORTEX, said that the current market is adding more hedging positions after the rise, rather than seeing a large-scale consensus on shorting, so extreme short trades that could trigger a "squeeze play" have not yet emerged. Next, the performance of corporate earnings reports will become a focus in the market. LSEG data shows that earnings for S&P 1500 semiconductor and equipment companies are expected to increase by over twice compared to last year, mainly driven by NVIDIA Corporation and Micron; however, industry earnings growth is expected to slow to 46.1% in 2027. Additionally, macro factors such as the future path of interest rates by the Federal Reserve, changes in the situation in the Middle East, etc., may also affect the market's judgement on industry profitability prospects. Valuation pressure is starting to show, and industry cycles are still hard to ignore Despite experiencing significant increases, the valuation of some leading companies has actually fallen. Data shows that NVIDIA Corporation's forward P/E ratio is currently around 19 times, a new low in over a decade; Micron's May forward P/E ratio once dropped to 5.4 times, the lowest in nine years. Chris Maxey, Chief Market Strategist at Wealthspire Advisors, said that over the past two years, the decline in chip stock valuations is primarily due to the rapid growth of corporate earnings exceeding the pace of stock price increases. However, for companies like Intel Corporation, AMD, and Marvell Technology, Inc., their forward P/E ratios are still significantly higher than the long-term average, meaning that the market has high expectations for future profit growth. If performance fails to meet these expectations, investors may once again focus on the strong cyclical nature of the semiconductor industry, especially in the field of storage chips. Marija Veitmane, Director of Stock Research at State Street Global Markets, stated that the cyclicality of the semiconductor industry will not disappear, but the industry's economic cycle may become longer in the future.