Wall Street experienced a robust rally, with the S&P 500 jumping 1.46 per cent and the Nasdaq reaching new highs, up over 2 per cent. Initial claims of a potential Iran peace deal briefly saw oil prices dip below US$100 a barrel, yet the primary catalyst for the market’s ascent was the burgeoning artificial intelligence (AI) trade. This movement unfolded amidst renewed concerns in the US bond market and rising petrol prices.
Trillions of dollars invested in AI infrastructure have created a shortage of computer and memory chips, granting chipmakers pricing power, high margins, and booming profits. Advanced Micro Devices (AMD), a leading designer and manufacturer of microprocessors and graphics processing units, surged 19 per cent after strong earnings, lifting its year-to-date gains to 89 per cent. Other major semiconductor firms like Intel, Super Micro Computer, and Nvidia also recorded increases, with memory chip makers seeing shares double or quadruple. The Philadelphia Semiconductor Index (SOX), comprising 30 prominent chipmakers, has soared 65 per cent since the year’s commencement, with its market capitalisation now representing 22 per cent of the S&P 500, a notable increase from October 2022.
While this momentum is powerful and supported by genuine earnings growth, its parabolic nature warrants scrutiny. Market intelligence service Bespoke Investments notes the SOX index trades at an elevated 13.2 times price-to-sales, compared to the S&P 500’s 3.5 times, highlighting stretched valuations. This rally’s concentration is stark; only 55 per cent of S&P 500 constituents are above their 200-day moving average, indicating chipmakers are driving most recent gains. Despite current strength, a healthy pullback in chip stocks appears overdue. Production increases will eventually materialise, but they require time. Investors should recognise that recent gains on Wall Street might be more fragile than they appear, with the pivotal chip trade set to define market factors moving forward.
