Is the "biggest negative" for chip stocks finally here? Will Meta be the "first major company to cut capital spending"?

Meta's plan to sell surplus computing power has shattered the market's core belief in "absolute scarcity of compute," triggering a sharp outflow of funds from chip stocks. This strategic shift also signals a turning point in the market's tolerance for unrestrained capital expenditures by tech giants.

The news sparked extreme polarization in the secondary market. Meta, which proactively signaled a reduction in spending, saw its stock surge 10% in a single day, its best performance of the year. Meanwhile, traditional AI hardware beneficiaries—semiconductor giants, memory chip makers, and emerging cloud service providers (Neocloud)—suffered heavy losses, dragging the Nasdaq index into significant volatility.

Wall Street institutions widely interpret this as a major narrative shift in the AI investment cycle. The focus of capital is rapidly shifting from pure hardware infrastructure buildout to corporate free cash flow stability and compute utilization. Investors are now rewarding tech giants that demonstrate financial discipline with real money.

This reshaping of the underlying logic not only rewrites the power dynamics between hyperscale cloud providers (Hyperscalers) and chip suppliers but also leads to a collapse-style disintegration of crowded momentum trading strategies, injecting new uncertainty into the upcoming U.S. earnings season and market liquidity.

Meta pivots to sell "excess compute," Big Tech capital spending faces a turning point

According to Bloomberg, Meta is forming a new business unit to sell its excess computing power to external customers for revenue. Sources say potential plans include allowing external access to various AI models hosted on Meta's existing AI infrastructure, similar to AWS's Bedrock service. Meta will operate the data centers and chips powering models like Muse and Spark, charging developers for access.

Moreover, Meta is also considering directly selling "raw" computing power. Ironically, Meta had just signed multi-billion dollar contracts with emerging cloud providers like CoreWeave and Nebius, and now this move means it will turn around and compete directly with its own suppliers.

This internal initiative, called "Meta Compute," aims to build and manage the company's AI infrastructure. The team is co-led by Meta infrastructure chief Santosh Janardhan, AI executive Daniel Gross of the Super Intelligent Lab, and Meta President Dina Powell McCormick.

In fact, hints of this shift emerged earlier. Meta CEO Mark Zuckerberg hinted to investors during a shareholder call in May that selling excess compute or API services was "definitely on the table." Another company that previously sold excess compute, SpaceX, is also facing increasing competition in selling compute power.

"Compute Scarcity" logic challenged, chips and momentum stocks suffer heavy losses

Meta's move directly challenges the core premise that has driven recent surges in chip stocks. Rich Privorotsky, head of Goldman Sachs' 1-Delta trading desk, warned that the market's core premise has been compute scarcity. Once supply increases and rental prices fall, the scarcity narrative will be directly overturned, and the hardware sector will feel the pain first.

As a result, chip and memory stocks took the brunt, with star stocks like Nvidia, Micron, and SanDisk facing heavy selling. Emerging cloud service providers were seen as the most obvious losers, with their stocks posting some of the largest single-day declines this year.

The hardware sector crash triggered a full-scale collapse of momentum strategies. Goldman Sachs' high-beta momentum basket (currently dominated by chip and memory stocks) plunged 9% in a single day after hitting historic highs. BTIG analyst Jonathan Krinsky noted that the long-short high-beta momentum index fell 10%, its worst daily performance since 2020.

Additionally, the spread between the Bloomberg Mag7 index and the Philadelphia Semiconductor Index (SOX) reached its largest single-day extreme (+8%) since 2015, indicating a massive outflow of capital from the semiconductor sector.

Market logic reshaped, investors reward "spending cuts"

In stark contrast to the hardware sector's gloom, the market placed a high premium on signals of reduced capital spending. As Goldman Sachs predicted, the first hyperscaler to hint at slowing spending would be rewarded with stock gains.

Meta's 10% surge confirms this judgment, suggesting investors believe that at current valuation multiples, incremental revenue streams and financial discipline are more attractive than an endless arms race.

UBS trader Christina Dwyer said the reports shifted the market narrative toward stricter financial discipline, easing concerns about rising capital expenditures. Capital spending expectations are no longer tilted upward, and the focus has turned to free cash flow stability.

Against the backdrop of capital rotation, the software sector posted its second-largest single-day excess return relative to semiconductors in a year.

Increased competition and liquidity concerns; upcoming earnings as key guide

Meta's entry complicates the supply-demand outlook for hyperscalers. While the emergence of a new competitor disrupts the status quo, easing supply chain bottlenecks could also reduce cost pressures.

UBS notes that the mention of "excess capacity" raises concerns about underlying real AI demand. Looking ahead to the upcoming Q2 and Q3 earnings seasons, corporate guidance and full-year capital spending plans will be key to determining whether the current valuation revaluation can persist.

What's worth noting is that while the market undergoes massive rotation, it faces severe liquidity risks. Goldman Sachs' trading desk warns that despite U.S. stocks posting their highest average daily volume since 2026, market liquidity remains extremely poor. In June, top-of-book liquidity for S&P E-mini futures plunged 33% month-over-month from $12 million to just $8 million.

This means the market is conducting record-breaking trades in a dramatically shallower liquidity pool. Every large order triggers more volatile market moves, execution costs are rising, and the risk of an intraday flash crash remains high. Combined with the seasonal weakness of momentum stocks in July, the battle between chip stocks and the broader market may face even more violent turbulence.

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