The Tech Sector Should Brace for Further Turbulence

The tech sector, specifically the semiconductor industry, is no stranger to volatility. Recent developments have demonstrated the cyclical nature of chip demand, despite the ongoing AI boom and record highs for tech stocks. In October, ASML, the Dutch chip-making equipment giant, reported a surprising slump in orders. This was driven primarily by weaker consumer spending on products like smartphones, gaming consoles, and electric vehicles (EVs), sparking a brief but significant decline in tech stocks.

In contrast, Taiwan Semiconductor Manufacturing Company (TSMC), a key player in the global chip manufacturing ecosystem, posted strong quarterly earnings. TSMC is benefiting from ongoing AI demand, bolstered by its dominance in advanced chips production, particularly amid struggles faced by competitors such as Intel and Samsung. The firm's CEO, CC Wei, reinforced market confidence by confirming that AI demand remains robust and will continue to grow for years to come​.

This divergence between ASML and TSMC illustrates the volatility inherent in the semiconductor supply chain, reflecting broader uncertainties across the tech sector. Despite this, many investors continue to be bullish on tech, with Wall Street projecting that the revenue of the "Magnificent Seven" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) will exceed $2 trillion in 2023, growing by 13%. However, this optimism must be tempered by the realities of weakening consumer confidence and mixed signals within the industry.

MY ANALYSIS

In my view, the recent developments in the chip industry highlight an important point: despite the long-term secular growth drivers such as AI, cloud computing, and digitalisation, tech stocks—especially semiconductor manufacturers—are highly sensitive to short-term economic conditions. ASML’s dip in orders, largely driven by softer consumer demand, suggests that tech companies are not immune to the macroeconomic environment. Higher interest rates, persistent inflation, and weaker spending on discretionary goods like smartphones and EVs are exerting downward pressure on companies with consumer-facing products.

The cyclical nature of chips means that even though products like AI and cloud computing are seeing a structural increase in demand, the broader tech sector can experience sharp corrections. As evidenced by Nvidia’s recent 18% stock price decline after a minor dip in its gross margin, the market remains hypersensitive to even the smallest earnings or operational hiccup.

From an investment perspective, this calls for a cautious approach. While companies like TSMC remain well-positioned to capitalise on the AI boom, the near-term headwinds for consumer tech could present challenges. Investors may benefit from rebalancing their portfolios away from the more consumer-dependent tech companies toward those with exposure to AI and cloud computing infrastructure—areas that have proven resilient.

In addition, tech investors should remain aware of the broader economic outlook. If inflation continues to bite and central banks maintain a hawkish stance, this could further suppress consumer spending, dragging down companies reliant on discretionary spending. Earnings season will likely act as a litmus test for how well tech firms are weathering these conditions, and any disappointment could lead to significant market volatility.

In summary, while the long-term outlook for tech remains positive, the current environment calls for prudence. The mixed signals from the chip industry and the broader macroeconomic challenges suggest that investors should brace for further turbulence ahead.