Wall Street AI trade stalls as Broadcom guidance triggers semiconductor sell-off

Wall Street’s blistering artificial intelligence rally took a significant pause this week, with the S&P 500 snapping a nine-week winning streak and the Nasdaq Composite falling 4.2 per cent on Friday. The correction was primarily triggered by underwhelming third-quarter AI chip guidance from Broadcom, which caused its shares to drop 12 per cent. Investors quickly rotated capital out of semiconductors, the market’s hottest trade of the year, and into defensive sectors such as Health Care and Financials.

Kelly Kowalski, head of Investment Strategy at MassMutual, described the pullback as a healthy pause rather than a fundamental shift in the AI thesis. She noted that the market reaction was driven by very high expectations rather than any alarming big-picture data. Steve Sosnick, chief strategist at Interactive Brokers, characterised Broadcom’s results as a splash of cold water for the markets, suggesting that the sector had run ahead of itself.

Strong earnings from cybersecurity firms Palo Alto Networks and CrowdStrike also failed to impress investors. Sosnick noted that not all results would be blockbusters and advised against chasing stocks after large moves. The correction follows a period where investors had grown accustomed to outsized gains in AI-related equities, including chip designer Marvell, which Nvidia CEO Jensen Huang recently hailed as the next trillion-dollar company.

Compounding the pressure on growth stocks, rising bond yields following a stronger-than-expected jobs report have increased the likelihood of the Federal Reserve considering tightening measures to combat inflation. Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, urged investors to stay broadly diversified and avoid excessive speculation, describing the current environment as an air pocket for the technology sector.

Looking ahead, market dynamics may be further influenced by upcoming initial public offerings from SpaceX, Anthropic, and an expected filing from OpenAI. Brian Jacobsen of Annex Wealth Management noted that investors may need to liquidate other assets to fund these purchases, potentially drawing capital from other tech stocks. Consequently, his firm has shifted its strategy away from overweighting big-cap tech in favour of small to mid-cap companies.