Chip stocks experienced a rebound on Wednesday as investors became increasingly convinced that major companies would continue to invest heavily in the technical infrastructure to support Artificial Intelligence (AI). Shares of Nvidia, Arm, and AMD, which had fallen on Tuesday due to concerns about the sustainability of last year's strong AI rally, were able to recover.
The recovery was triggered by statements from Microsoft late Tuesday evening that the company would continue to invest heavily in AI. Nvidia closed 13 percent higher, adding $329 billion to its market capitalization in a single day. The UK-based chip designer Arm increased by over 8 percent ahead of its quarterly results, which were to be announced after the market closed. AMD, which reported strong demand for its AI chips on Tuesday evening, rose by 4 percent.
The Nasdaq Composite, the technology-heavy index, rose by more than 3 percent at times but closed with a gain of 2.6 percent. Florian Ielpo, head of macro at investment manager Lombard Odier, said that the stocks were supported by a relatively cautious stance from Federal Reserve Chairman Jay Powell.
While the Fed left interest rates unchanged on Wednesday, investors increasingly believe that the central bank could cut rates as early as September. "This allows the markets to overlook the highs and lows of the current earnings season and think about a better macro- and microeconomic future," added Ielpo.
Microsoft was the only one of the so-called Magnificent Seven megacap tech stocks to close lower on Wednesday, falling by 1%. The company narrowly missed high expectations for cloud growth in its second-quarter earnings report, despite demand for its AI services outstripping the available supply of computing power, which supported market sentiment for semiconductor suppliers.
Microsoft's Capital Expenditures for the Quarter Ending June 30 Amounted to $19 Billion, Nearly 80 Percent More Than in the Same Period Last Year and Above Wall Street Estimates. 'Almost All' of These Expenditures Were Allocated to Cloud and AI-Related Investments, said CFO Amy Hood.
TD Cowen Analysts Raised Their Forecasts for Microsoft's Capital Expenditures for Fiscal Year 2025 from $70 Billion to $84 Billion on Wednesday.
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Tech companies such as Google, Amazon, Microsoft, and Meta invest tens of billions of dollars annually in data center capacities to support a massive wave of AI applications anticipated since the rapid proliferation of OpenAI's ChatGPT app nearly two years ago. CFRA analysts expected Amazon to increase its capital expenditures this year to support its logistics network and AI infrastructure. For 2024, they projected a total expenditure of around $64 billion, up from $52.7 billion in 2023.
The CEO of Nvidia, Jensen Huang, said during an onstage interview with Meta CEO Mark Zuckerberg at an annual computer graphics conference that the social media group had installed about 600,000 of its latest AI chips. "You operate larger than almost anyone else," he said, to which Zuckerberg responded with a grin: "We are good customers.
Despite the pride of technology leaders in their AI capabilities, investors have become increasingly cautious about short-term returns on these expenditures in recent weeks. "The market is increasingly recognizing that the profit growth rate of these large technology companies is likely to slow down," said Manish Kabra, Head of US Equity Strategy at Société Générale. "Will the Nasdaq rise by more than 35 percent each year? Maybe, but probably not. So the market fluctuates, and traders rotate in and out of stocks like Nvidia.
Chip stocks received additional boost from a Reuters report that new U.S. export restrictions on semiconductor manufacturing equipment to China would exempt allies such as the Netherlands and Japan, where key suppliers like ASML and Tokyo Electron are based. ASML's shares rose by 5 percent following the report.
