Why Taiwan Semiconductor Manufacturing, Micron and ASML Holdings fell again today

Shares of semiconductor leaders Taiwan Semiconductor Manufacturing (TSM -4.43%), Micron technology (MU -3.56%)and ASML Holdings (ASML -5.21%) they fell again today, down 4.2%, 4.1% and 5.2%, respectively, as of 12:38 PM ET.

It’s been a terrible week for stocks in general and artificial intelligence (AI) trading in particular due to macroeconomic concerns. Of note, the semiconductor industry has long been considered highly cyclical. While the sector has actually been the top performer over the past decade due to its huge long-term growth, the prospect of a slowdown or recession is causing investors to shy away from these industry leaders right now. This is especially true after AI hype boosted shares of these stocks by a large amount from November 2022 to July 2024.

It appears to be a combination of today’s weaker than expected jobs report along with AI technology. BroadcomLast night’s slightly disappointing earnings report is causing shares of all closely related AI stocks to fall again today.

The weak jobs report is fueling fears of a slowdown

This morning, the Labor Department reported the jobs figure for August. That was a big deal for many investors as July’s much weaker-than-expected jobs report fueled fears that the Federal Reserve is behind the curve in cutting interest rates.

While today’s jobs report showed an increase in August from July, and the unemployment rate fell slightly, it was still slightly below expectations. In August, 142,000 new jobs were added, up from the 89,000 added in July, but below the 161,000 that was expected. The unemployment rate fell to 4.2% from 4.3%.

It’s a little hard to understand why investors took this report that bad, as it seems assured that the Federal Reserve will cut interest rates at its September 17-18 meeting. However, “rates” as well as downward revisions to the June and July job growth figures fueled uncertainty that the Federal Reserve is late in cutting rates or will not cut enough when its committee meets, which which could tip the economy into recession.

In any case, the market is in a very emotional mood this week, especially after the weak manufacturing data that came out to start the week on Tuesday morning.

Last night’s earnings report from Broadcom didn’t help matters. While the chip and software giant beat analysts’ estimates for its fiscal third quarter, its semiconductor revenue may have disappointed, while management’s guidance for the fourth quarter was also slightly lighter than expectations analysts.

As the name suggests, Broadcom’s portfolio spans many areas, including the iPhone, enterprise networking and storage, as well as the custom AI accelerators it makes for the internal projects of several tech giants.

Broadcom makes most of its chips at TSMC, presumably using ASML’s EUV equipment, and Micron’s memory permeates all technology applications. So it’s no surprise that all three reacted to Broadcom’s results.

Of note, Broadcom CEO Hock Tan said on the conference call with analysts that the AI ​​business was very strong, with custom AI accelerators growing 3.5x year-over-year, Ethernet switching for AI data centers 4x per year and increased optical lasers. triple. So it’s hard to tell whether the slightly weaker-than-expected forecast was conservative, whether demand for AI products is falling faster than investors thought, or whether Broadcom’s other non-AI products, whether iPhone chips, telecom connectivity or non-AI. networking, continues to be weaker than anticipated. Of note, those non-AI products have already been in a major decline, but are expected to recover.

Regardless, softer-than-expected overall chip revenue, even if AI remains strong, would hurt TSMC, Micron and ASML. While these companies also benefit from the rise of AI, each is also exposed to the entire broader semiconductor industry. ASML caught an unfortunate analyst downgrade on Wednesday, with the analyst pointing out that ASML’s exposure to AI may not be as large as some had thought relative to the broader industry, likely adding to its stock’s downside.

This could be an opportunity

Semiconductor investors should be aware that stocks in the sector are incredibly volatile, even though the sector has proven to be a long-term winner. So benefiting from these names involves holding back big recessions like these, or buying in the middle of what appears to be dire news in major recessions.

While the economy may be slowing, all three of these names are at the forefront of AI innovation and growth opportunity. Despite the market backlash, the vast majority of tech executives this earnings season said AI growth remains strong and should continue next year, and likely beyond. With these stocks now off their July highs, it may be time to consider adding these leaders over the next couple of tough months.