Strong Earnings Aren't Enough? Wall Street Now Focuses on One Thing: Future Outlook

As the U.S. stock market's earnings season enters its peak phase, the semiconductor sector has become the focal point for Wall Street. Fueled by the artificial intelligence (AI) boom, chip stocks have surged this year. Analysts estimate that S&P 500 semiconductor and semiconductor equipment companies will report a 133% year-on-year profit increase in the second quarter, accounting for nearly half of overall corporate earnings growth. However, after a sharp rise in stock prices, the market is shifting its focus from strong financial results to future outlook. Whether AI demand can continue to support high valuations will be the key factor determining the next move for chip stocks.

### Semiconductor Profits Surge 133% — Future Outlook Becomes Market Focus

According to LSEG data, S&P 500 semiconductor and semiconductor equipment firms are projected to post a 133% year-on-year profit increase in Q2, contributing approximately 44% of total S&P 500 earnings growth. In contrast, overall S&P 500 corporate profits are expected to grow 26% year-on-year, highlighting semiconductors as the primary engine of earnings growth this quarter.

This week, investors await earnings reports from Intel (INTC-US) and Texas Instruments (TXN-US), while NVIDIA (NVDA-US) is scheduled to release its results at the end of August. Market participants will scrutinize each company's forward guidance for signs of sustained AI demand strength.

However, recent market reactions suggest that strong earnings alone may no longer be sufficient to boost stock prices. TSMC (2330-TW)(TSM-US), the world's largest semiconductor foundry, reported a 77% year-on-year net profit increase in Q2—exceeding market expectations—yet its U.S. ADR closed lower after the earnings release. Similarly, Samsung Electronics announced a 19-fold surge in Q2 operating profit, but its stock price still plunged sharply. This reflects the market’s increasingly high expectations for future growth, surpassing the importance of single-quarter financial performance.

### AI Boom Inflates Valuations — Volatility in Chip Stocks Rises Sharply

The Philadelphia Semiconductor Index (SOX) has surged 65% year-to-date, far outpacing the S&P 500’s 9% gain. This rally has been driven by strong performance from AI-related stocks such as Micron (MU-US), AMD (AMD-US), and Broadcom (AVGO-US). However, market volatility has also intensified. Since July, SOX has retreated 18%, with half of trading days seeing intraday swings exceeding 3%. Last Friday’s closing price was over 20% below its late-June all-time high.

Rick Meckler, partner at Cherry Lane Investments, said, “It’s now shocking to see large chip stocks experience such dramatic daily swings. If companies deliver weaker-than-expected future guidance, it could further exacerbate market volatility.”

Market observers note that in addition to concerns over peaking AI demand, the surge in retail investor capital into options trading and the rapid expansion of leveraged ETFs have amplified chip stock volatility. Leveraged ETFs are forced to buy more shares when prices rise and sell when prices fall, further intensifying market swings.

South Korea’s financial regulator recently announced measures targeting leveraged ETFs on individual stocks like Samsung Electronics and SK Hynix to reduce market volatility. BTIG also warned in a recent report that while the semiconductor industry’s performance remains strong, recent volatility is concerning, with many market signals resembling those seen during the peak of the 2000 dot-com bubble.

Jake Dollarhide, CEO of Longbow Asset Management, said, “The AI investment frenzy has rapidly driven chip demand, but the market is beginning to worry that this demand cannot remain at peak levels forever. Any company missing market expectations during earnings season could face massive sell-offs.”

Nonetheless, some analysts argue that AI is not the only growth driver. Daniel Morgan, portfolio manager at Synovus Trust, pointed out that demand for industrial electronics, wireless communications, and automotive chips is improving simultaneously. Semiconductor demand is gradually expanding into more end markets, though smartphone-related chip demand remains relatively weak. Qualcomm and other smartphone chip suppliers continue to face significant pressure.