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Thought of the day

Semiconductor stocks fell on Monday as investors grew increasingly concerned over financing risks tied to AI infrastructure spending and intensifying competition from China. Uncertainty over the durability of capex and cloud growth, ahead of a slew of US hyperscaler earnings this week, has also kept markets on edge. The Philadelphia Semiconductor Index slid 2.2%, underperforming the S&P 500’s 0.02% gain.

The recent relative underperformance of the semiconductor industry has been notable, especially after its strong run in the second quarter of this year. Over the past month, the Philadelphia Semiconductor Index has fallen 12.5%, while the financial, health care, and industrial sectors have all posted gains.

We maintain a constructive outlook on semis amid robust AI demand, but we believe the recent divergence in sector performance is in line with our view that there are more ways to participate in potential market gains than through a narrow set of AI-linked stocks. In fact, we see opportunities across sectors and regions.

Strong US earnings suggest the rally can broaden beyond tech. Results from the second-quarter earnings season have been strong so far, with four out of five companies beating earnings per share estimates. Management teams have also pointed to continued resilience in corporate profits. Banks delivered solid net interest income and loan growth amid robust capital markets activity, while credit card companies reported healthy consumer spending and improving delinquency rates. Travel companies also reported robust demand, while GE Vernova’s results were consistent with continued strength in electrification demand. We believe the risk is that results surpass our estimate of 28% year-over-year growth in S&P 500 earnings per share for the second quarter if companies continue to post solid earnings at this pace, and strength in earnings across sectors should support a broader rally.

Asian market leadership is expanding as regional laggards regain momentum. Regional underperformers in the first half of this year—including Southeast Asia, China, and India—have all outperformed tech-heavy North Asian markets since the start of July. And while the AI hardware supply chain in the region should continue to be a key driver, we believe this broadening of performance can be sustained amid resilient economic growth and improving earnings momentum. For example, India’s cyclical recovery is being reinforced by structural growth drivers beyond AI, while the “Value-up” movement remains an important catalyst for select Southeast Asian markets like Singapore. In China, we expect internet earnings to stabilize, and we see opportunities in cyclical sectors including financials, industrials, and select consumer discretionary companies, as well as health care.

Improving Eurozone activity points to a stronger earnings cycle ahead. July’s flash PMI readings for the Eurozone showed the first expansion in business activity in four months, supported by a renewed expansion in services and the fastest increase in manufacturing output since March 2022. Details from the survey also showed that new orders rose at the fastest pace since April 2023, and employment increased for the first time this year. While tensions in the Middle East remain a risk, we think the Eurozone is well positioned to benefit from a bottoming of the industrial cycle and from structural investments across AI, electrification, defense, and energy security. We anticipate a meaningful earnings cycle that will exceed current market expectations, forecasting around 25% earnings growth over 2026 and 2027.

So, we continue to favor a diversified approach to stock investing, and believe investors can benefit from a wider range of opportunities and growth drivers by broadening exposure across sectors and regions.