The second quarter earnings season kicks off next week, and all eyes are on AI-driven semiconductor stocks that have delivered staggering returns over the past year. Dutch lithography giant ASML and Taiwan Semiconductor Manufacturing Company (TSMC) are set to report results that could either reinforce or undermine the AI rally that has powered the broader market.
ASML hit an all-time high near $2,000 per share at the end of June, representing a 172% gain from a year earlier. TSMC surged 110% over the same period. Both have since pulled back from those peaks amid profit-taking in early July, but their year-long trajectories remain extraordinary. The iShares Semiconductor ETF (SOXX), which includes NVIDIA, AMD, Intel, and Marvell, gained 160% over the past twelve months before a recent two-week pullback.
These outsized gains have been supported by a string of strong earnings beats, robust order books, and impressive profit margins. However, the question now is whether the second quarter will deliver more of the same or signal a turning point. Samsung's 7% post-earnings drop earlier this month already hinted at potential AI rally fatigue.
Forward Guidance Is the Key Variable
While most AI-related companies are expected to beat consensus estimates for both earnings and revenue, the market's focus will be on forward guidance. In early June, Broadcom dropped 12% in a single day despite beating expectations, after it maintained its full-year chip revenue target rather than raising it. A few weeks later, Micron Technology initially popped on its results but then reversed sharply as doubts emerged about the sustainability of the AI-driven memory chip boom.
These episodes suggest that investors are increasingly scrutinizing the trajectory of growth. With many chip stocks trading at elevated valuations, any hint that near-exponential sales growth is moderating could trigger significant sell-offs. The recent chip selloff that pressured the Nasdaq underscores the market's sensitivity to any negative signals.
Valuation Concerns Loom
The broader semiconductor sector has outperformed the tech-heavy NASDAQ 100, which rose 35% from July last year to its early June high, and the S&P 500, which gained 22% over the same period. While these comparisons highlight the exceptional performance of chip stocks, they also raise questions about valuation. The AI-driven earnings surge has sparked debate over US stock valuations, with some analysts warning that markets are priced for perfection.
Investors will be watching for any signs that the return on investment from AI development is falling short of expectations. The massive capital expenditures required for AI infrastructure have fueled growth for chipmakers, but the ultimate profitability of those investments remains unproven. If forward guidance from ASML or TSMC suggests a slowdown in orders or a more cautious outlook from customers, it could remove a key support from the rally.
What to Watch Next Week
Bank earnings from JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley will also be in focus, but the AI-adjacent reports from ASML and TSMC are likely to have the most impact on tech and semiconductor sentiment. Netflix results will provide additional insight into consumer and streaming trends.
For now, the AI chip rally remains intact, but the margin for error is thin. A strong beat combined with raised guidance could reignite momentum, while any caution could accelerate the recent pullback. As always, the market's reaction will depend not just on the numbers, but on the story management tells about the future.
This article is for informational purposes only and does not constitute financial advice.
