Chipmakers will keep lurching until the Fed and US voters decide

Chip stocks are caught between stubborn inflation, rising borrowing costs and political uncertainty, with the Fed and US midterms set to shape the next move.

Words by Nigel Green, deVere group CEO and founder

Chip stocks have become the global market’s pressure gauge, and the needle is swinging violently.

The recent rout in Asia showed just how violently. South Korea’s Kospi closed 7.57% lower in a single session after an 8% plunge forced a 20-minute trading halt, while Japan’s Nikkei 225 shed almost 5%. Of the 916 shares traded in South Korea that day, a mere 52 finished higher.

The slide capped a seven-session losing run for the Kospi, its longest since September 2024, and left the index down more than 16% in a month.

Investors are trying to price the most rate-sensitive corner of global equities while two huge questions hang unanswered: where US interest rates go next, and who controls Congress after the November 3 midterms.

Until both are settled, sessions like these are likely to keep arriving, and the swings could just as easily be violent rallies as sell-offs.

US inflation lit the fuse. Consumer prices jumped 0.6% in September, the fastest monthly rise in five months, pushing annual inflation to 3.7% and reviving bets on further Federal Reserve hikes.

Credit markets then poured fuel on it, as bonds issued by a heavily indebted AI cloud provider slid towards distressed territory. The episode served as a stark reminder of how much of the AI build-out is running on borrowed money.

Rates turn the screws

Rising rates hit chipmakers from two directions at once. They shrink the present value of profits expected years down the line, which matters enormously for companies priced on future growth.

They also raise the cost of the colossal borrowing needed to build data centres and the infrastructure behind AI. When a business at the heart of that build-out sees its debt dumped this aggressively, the market immediately starts hunting for the next stretched balance sheet.

Semiconductors also carry the weight of their own success. They led the rally, they attracted the most momentum money, and they give back the most when sentiment sours. Momentum is a powerful friend on the way up and a ruthless one on the way down.

Strong earnings haven’t provided the cushion many expected. Several of the sector’s heavyweights have delivered excellent results, only to watch their shares lurch regardless.

Earnings can’t outrun yields

A company can post a stellar quarter and still get dragged around when rates are moving against it. Also, fresh concerns over Chinese competition in memory chips have added another layer of pressure on Asia’s tech-heavy markets.

Of course, none of this undermines the industry’s fundamentals. Demand for AI hardware is booked years in advance, and the leading chipmakers are financially robust.

What’s shifted is the multiple investors are willing to pay for that growth, and for now the bond market is the one setting it.

All eyes on the Fed

The calendar explains why the uncertainty is so acute. Fed policymakers meet on October 27 and 28, less than a week before Americans head to the polls, and gather for the final time this year on December 8 and 9.

My view now is that the Fed is likely to hold at its October meeting and raise rates again in December.

Until that path is clearer, and until the election result is known, every inflation print, jobs report and Fed speech is likely to move prices far more than it normally would. More dramatic sessions, in both directions, look likely before the year is out.

Australian investors won’t find much shelter at home. Inflation here hit 4% in August, the Reserve Bank lifted the cash rate again at the end of September, and local tech and growth stocks tend to take their cue from shifts in US rate expectations.

When the global repricing of tech gathers pace, the ASX feels it too.

Volatility does the clearing

Turbulence of this kind is uncomfortable, but it serves a purpose. It flushes out speculative excess and pulls valuations back towards levels anchored in earnings and cash flow, which leaves the sector on firmer footing for its next leg.

Markets that never correct tend to build up far more dangerous imbalances.

Once the rate outlook sharpens and the midterms are behind us, attention is likely to swing back to the extraordinary long-term demand for AI hardware, a structural trend measured in years and decades.

Until then, the chip sector will keep doing what it always does when the macro picture is foggy: amplifying every data point, every rumour and every twitch in the bond market.

Nigel Green is the group CEO and founder of deVere Group, an independent global financial consultancy.

The views, information or opinions expressed in the commentary in this article are solely those of the author and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial advice contained in this article.

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