Written by: Rita

Monday's market situation left many U.S. stock investors a bit confused.

The Philadelphia Semiconductor Index once fell nearly 5% during the session, closing down 2.23%, reaching a new low since May 20. Individual stocks were under pressure, with Nvidia down 5%, SanDisk plummeting 11%, SK Hynix ADR down 7.5%, AMD down 5.2%, and ASML down 5.8%. Goldman Sachs trader John Flood mentioned in a briefing that the volume of consultations had increased and market sentiment had weakened.

Nvidia Rumor as the Tipping Point

The rumor about Nvidia triggered this round of selling. According to media reports, Nvidia is negotiating to provide financial guarantees for OpenAI's Ohio data center project at a level of $250 billion, and may also participate in chip financing, potentially adding another $350 billion to the scale.

Flood quoted the views from the trading desk in the briefing: if this deal is finalized, it may later be marked as the high watermark of AI financing mania. Questions about "how much more space is there for AI capital expenditure" are shifting from peripheral discussions to mainstream narratives.

The explosive performance of Longsys Technology on its first day of listing in China and the slide of ASML due to rumors within the industry have also exacerbated the adjustment pressure on the sector.

Credit Risk Replaces Computing Narrative as the Focus

Flood also pointed out that the focus of the market is changing. AI capital expenditure has shifted from a driving force to a subject of scrutiny, and credit risk has replaced the computing narrative as the most sensitive topic at present.

LSEG data shows that CDS prices for companies such as Oracle, SpaceX, Google, Amazon, Meta, and Broadcom have recently hit all-time highs. The signals from the bond market are clear: the huge expenditures by large tech companies on data centers, chips, and storage are raising concerns among credit investors.

This concern is logically valid. When a company needs to maintain huge capital expenditures while financing in a high interest rate environment, it is inevitable that credit spreads will rise. The AI computing narrative is very attractive, but debts have to be repaid.

Low Valuations but Selling Continues

The forward P/E ratio of the Nasdaq 100 Index has fallen to 21.8 times, nearly 10% below the average of 23.6 times over the past decade, marking the lowest level since the start of the AI boom in early 2023. From a valuation perspective, tech stocks are no longer considered expensive.

However, Flood noticed an unusual phenomenon: semiconductor companies continue to report strong earnings, yet their stock prices generally decline after earnings announcements. Cheap valuations and performance exceeding expectations have not stopped the sell-off, as the market is preemptively digesting this week’s dense schedule of tech earnings reports.

This means the market focus has shifted from this quarter's EPS to expectations for the next few quarters. If the AI financing model comes under doubt and the slope of capital expenditure slows, downward revisions to earnings predictions are just a matter of time.

Rising Interest Rates are a Greater Macro Pressure

On the macro level, U.S. Treasury yields have risen over the past week. The 10-year real yield has reached its highest level since 2023, and the 30-year real yield is approaching 3%, a level that has been met in only a few months since the global financial crisis.

Flood's statistics show that when the monthly increase in interest rates exceeds two standard deviations, historical performance of U.S. stocks has generally been weak. If the nominal yield on 10-year Treasuries rises to around 5% in the short term, or the real yield rises to around 2.7%, the pressure will be even greater.

This means that even if there is no change in the AI narrative, the rise in the risk-free rate itself is depressing the valuation ceiling of all growth stocks.

Unusual Divergence of Individual Stock Volatility and Indices

Flood also noticed a rare phenomenon: a divergence between the average volatility of S&P 500 component stocks and the implied volatility of the index. The volatility at the individual stock level is far higher than at the index level, indicating that the market is undergoing structural differentiation.

In the short term, individual stock volatility may remain high, but the major index is still expected to stabilize supported by corporate earnings. The Federal Reserve is unlikely to raise interest rates on Wednesday, although the market has already absorbed expectations for a rate hike in September.

The essence of this decline is the market's first collective review of the sustainability of the AI financing model. The CDS market has raised a yellow card first, and this week’s earnings reports are the next hurdle. Microsoft and Meta are leading the way on Wednesday, followed by Apple and Amazon on Thursday. If leading companies can demonstrate spending efficiency through profits, this round of selling may just be a sharp turnover on the road to recovery. If they cannot, the stress test will be intensified.

Disclaimer

This article is a compilation and interpretation of public market information by Chao Xiang Research and does not constitute any investment advice.

The market carries risks, and decisions must be made independently. This article should not serve as the basis for buying or selling any securities.