Semiconductors have been one of the defining areas of market leadership, but recent trading suggests investors are beginning to reassess the balance between growth expectations, valuation risk and the path of interest rates.
For much of last week, US equities appeared set to continue their recent upward momentum. That changed as pressure emerged in major chip-related shares, beginning with Broadcom, whose shares fell sharply despite strong results. The move signalled a shift in sentiment across the semiconductor sector, with Micron, Intel and Nvidia also retreating as investors started to rotate towards other areas of the market.
The weakness then broadened internationally. Key Korean technology names, including Samsung and SK Hynix, fell heavily, contributing to a sharp decline in the KOSPI index. Taiwan also came under pressure, with Taiwan Semiconductor moving lower.
The trigger for that shift was the latest US employment data. May nonfarm payrolls showed 172,000 jobs added, well ahead of consensus expectations, while positive revisions to the previous two months added further strength to the labour market picture. This reduced the likelihood that the Federal Reserve would be able to respond with the rate cuts many investors had expected earlier in the year.
Inflation has remained above the Federal Reserve’s target for an extended period, and higher energy costs are still expected to feed through into the wider economy. Money markets are now assigning a significant probability to a quarter-point rate increase in December, a clear change from expectations at the start of the year, when forecasts pointed towards lower rates by year end. Higher expected rates have weighed on US Treasury prices, pushed yields higher and increased pressure on highly valued equity sectors, including semiconductors.
A market less dependent on semiconductors and artificial intelligence could prove more balanced over time, even if the transition creates short-term volatility. Rotation into other sectors would reduce concentration risk and may create opportunities in areas that have been overshadowed by a narrow group of high-profile technology stocks.
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