What are investors worried about? U.S. chip sector collectively pulls back, market waits for Nvidia earnings to set direction

On Tuesday, U.S. chip stocks collectively retreated from record gains driven by AI. Recently, the rally themed around AI has shown a broad blossoming trend, no longer limited to Nvidia alone, and has pushed the entire chip sector to new highs. That day, Qualcomm plummeted over 11%, marking its worst single-day performance since 2020, and was the largest decliner among S&P 500 components. Intel fell the second most, down nearly 7% that day.
Despite the sharp decline on Tuesday, Intel's stock price has risen 85% over the past month and nearly 227% so far this year, as the market gradually recognizes the importance of its server central processing units (CPUs) in the AI era. In the memory chip sector, Micron Technology dropped about 4%, and SanDisk plunged around 6%. However, SanDisk's stock has surged more than sixfold since the beginning of this year. Additionally, Skyworks Solutions fell over 5%, and Marvell Technology declined about 4%. The chip sector tracking iShares Semiconductor ETF fell 3%. The Philadelphia Semiconductor Index dropped sharply over 3% on Tuesday, but the index's year-to-date gain still exceeds 60%.
What are investors worried about?
The trigger for this pullback was: key U.S. inflation data higher than market expectations, combined with Iran tensions pushing oil prices up, prompting investors to shift into "safe-haven mode." Analysts pointed out that there is a "buying exhaustion" phenomenon in the market, and investors are also concerned that the latest inflation data could negatively impact commitments to data center spending. Jefferies stock trading analyst Jeffrey Favuzza said Tuesday that one reason for the overall decline in the semiconductor sector is, "after the recent rally, there are signs of some buying exhaustion."
Davidson Managing Director Gil Luria pointed out broader concerns about high inflation. In an email to the media, he said that investors see the latest inflation data as "a signal: if companies cut back on AI investments, the pace of data center construction could slow." He noted this would lead to a decline in chip demand. The next market catalyst: aside from Nvidia's earnings report, investors are diversifying funds into various hot areas seen as beneficiaries of AI, which previously had not been fully recognized for their importance to AI infrastructure. Investors bet that the transition from AI training to AI agents will boost demand for other AI components, including memory chips and GPUs. Bernstein analyst Stacy Rasgon recently said, "Funds first flowed into the memory chip sector, then shifted to semiconductor equipment, optical modules, power systems, and CPU fields. These sub-sectors had not been previously recognized by the market as being driven by the AI wave."
The next focus for investors will be Nvidia's earnings report, which is considered "the most important report in the universe" and will be the core force shaping the next move of the U.S. stock market, as it will provide key evidence on whether global AI infrastructure demand remains strong. Nvidia plans to release its fiscal first-quarter results for the period ending April 26 after the U.S. stock market closes next Wednesday (May 20). Wall Street widely expects Nvidia to deliver far exceeding expectations in revenue and profit growth. The well-known Wall Street investment bank Wedbush recently said that the Q1 earnings season has already sounded an alarm for skeptics watching the AI revolution from the sidelines, and Nvidia's upcoming earnings report should serve as another catalyst for the rally in tech stocks.