AI sector rebound follows week of negative developments

Last week brought a wave of negative headlines. American voters voiced opposition to data center construction across the country, Anthropic revised its IPO valuation downward, and Nvidia, a central figure in the AI landscape, faced a scandal involving espionage and alleged misconduct concerning its CEO, Jensen Huang.

The Nasdaq-100 surged 3.4%, while the Philadelphia Semiconductor Index (SOX) jumped 7%, despite Nvidia’s own 4.3% decline. Trading desks noted unusually intense selling pressure in the semiconductor group leading up to Thursday, with the Nasdaq-100 reaching oversold levels similar to those seen during the March 30 Iran conflict. The CBOE S&P 500 Volatility Index spiked before receding, signaling a potential shift in market sentiment.

“The recent decline and subsequent uptick in risk aversion had many elements of capitulation,” stated Laurent Laskowski, options strategist at Baird Strategas. “record options activity, a sharp spike in volatility, skew and correlations, an inverted VIX curve, and forced liquidations…The setup, therefore, is one where the market is seeing the [downside] left tail narrowing while the [upside] right tail is fattening.”

While some analysts caution against aggressive buying, the market’s recent performance suggests a potential shift. The S&P 500 first reached 7500 on May 14, a date that now seems to mark a turning point, as the index has struggled to surpass that level since.

The period since May 14 has been characterized by declines, including the collapse of Cerebras Systems shares from a high of $386 to $97, and a 17% drop in the semiconductor group. A potential base may be forming, built on more conservative expectations.

However, concerns remain about the long-term health of the AI sector, and whether investor confidence can be fully restored. The market will need to demonstrate sustained progress, exceeding the 20-day moving average, to confirm the rebound’s legitimacy. This would require a 1.3% gain for the S&P 500, 3.7% for the Nasdaq-100, and 9% for the SOX.

The Nvidia scandal, while creating uncertainty, occurred at a time when valuations were already depressed due to concerns about unsustainable profits and data center slowdowns. This allowed other semiconductor stocks to rally, resulting in a $200 billion loss in Nvidia’s market capitalization.

Despite the temporary relief, the S&P 500’s overall valuation remains a concern, particularly when considering free cash flow, which appears less attractive than earnings.