Chip manufacturers are dominating the scene on Wall Street, with sharp volatility in their stocks this month, as investors bet that a small group of companies with massive market capitalization will contribute about half of the earnings growth of the S&P 500 index during the second quarter.

The Philadelphia Semiconductor Index (Philadelphia PHLX) has seen a strong rise since the start of the year, driven by large gains from companies such as Micron Technology, Advanced Micro Devices, and Broadcom. However, the index, which includes 30 stocks, has recently become prone to sharp movements, according to Reuters.

The index has risen 65% since the start of the year, compared with gains of 9% for the S&P 500, but it fell 18% in July after experiencing daily fluctuations exceeding 3 percentage points in half of the 12 trading sessions this month. The semiconductor index also ended Friday's trading down more than 20% from its record closing high reached in late June.

Concerns about the sustainability of demand for AI chips, along with volatility in the semiconductor market, have raised investor questions about whether the sector needs a reassessment.

Although expectations point to strong financial results, investors are waiting to see if these earnings will be enough to end the summer weakness in the market, or whether the growing size of the chip sector will make any disappointment more impactful on stock movements.

Rick Meckler, partner at Cherry Lane Investments, a family investment firm based in New Vernon, New Jersey, said: 'The daily movements in stocks of companies of this size are truly astonishing. Will earnings results change this trend? Possibly, and it could happen if future guidance is disappointing.'

Intel logo at the company's headquarters in Santa Clara (dpa)

Big Earnings Jump Expected

Tajinder Dillon, head of earnings research at the London Stock Exchange Group, expects earnings of semiconductor companies and chip manufacturing equipment listed on the S&P 500 to rise 133% in the second quarter compared to last year, contributing about 44% of the total earnings growth of index companies.

According to London Stock Exchange Group data as of Friday, S&P 500 companies' earnings overall are expected to rise 26% in the second quarter year-on-year.

Among US chip companies, Intel and Texas Instruments are preparing to announce their results this week, while Nvidia will not report its financial results until late August.

However, the market reaction to some strong results released last week indicates a shift in investor sentiment. Shares of Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest chipmaker listed in the US, fell despite reporting a 77% rise in second-quarter net profit, beating market expectations.

Earlier this month, shares of Samsung Electronics fell sharply, despite the company reporting a 19-fold leap in its operating profit for the second quarter.

Role of Leveraged Funds in Increasing Volatility

Some market watchers attribute part of the current volatility to the impact of the Sarbanes-Oxley Act (SOX) and the companies listed under it, which have become the focus of retail investors, contributing to the growth of leveraged ETFs.

These funds amplify market movements, increasing demand for stocks during rallies, but they may also strengthen selling pressure when prices fall.

Meckler said: 'One of the main factors that has driven the prices of many of these stocks is options trading activity by retail investors, and this is an important element in explaining the size of the volatility we are seeing.'

South Korea's financial regulator on Thursday announced regulatory measures to curb volatility caused by leveraged ETFs linked to individual stocks, which include companies such as Samsung Electronics and SK Hynix, and were launched in the Korean market in late May.

BTIG wrote in a recent note: 'Despite the exceptional performance of the semiconductor sector, the level of volatility has also been high,' pointing out that some current indicators 'look very similar to the conditions at the peak of March 2000.'

Jake Dollarhide, CEO of Longbow Asset Management in Tulsa, said that heavy spending on artificial intelligence has boosted demand for chips, but he noted growing concerns that investor expectations may be overblown.

He added: 'This demand for AI application chips is not a permanent situation. During earnings season, any company that provides disappointing guidance could face significant losses.'

Samsung Electronics logo in this illustration (Reuters)

AI Expands Demand Scope

Chip manufacturers have long been known as cyclical companies heavily affected by global economic cycles, but the rise of AI has boosted the sector's importance and increased the stakes on it.

Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, said one reason for continued optimism is that demand is not limited to data centers but extends to other sectors such as industrial electronics, wireless communications, and automotive.

He added: 'We are seeing an expansion in the scope of these sectors.'