[MARKET ANALYSIS] Commentary on the recent AI-related sell-off and near-term points to watch

Recap:

AI chip and memory names globally have sold off over the past few days, with a wide range of catalysts to drive the move:

• Disappointing Broadcom (AVGO) guidance: the company guided Q3 AI semiconductor revenue of USD 16bln, below the expected USD 17.2bln.
• Post-NFP market pricing for the Fed: Friday’s NFP printed stronger than expected (172K vs exp. 85K), with upward revisions to the prior figure.
• Geopolitical tensions: Hopes of a US-Iran deal in the near future seem dim, leading to elevated oil prices for longer and higher yields. Higher yields = higher discount factor for future valuations = weighs on tech
• Stretched positioning globally (YTD gains pre-drop): KOSPI +112%, Nikkei 225 +43%, TAIEX +69%, NDX +22%.
• New IPOs: SpaceX, Anthropic and OpenAI IPOs could require investors to sell current positions to take part in the upcoming IPOs.

Commentary:

• Goldman Sachs: “Crowded positioning, narrow market breadth and the prospect of higher-for-longer interest rates make the stock market more vulnerable to abrupt pullbacks. All of that creates an environment where factor unwinds can become materially more violent than index-level volatility implies.” (VIX currently trades at 20.9).
• Barclays: “Volatility-controlled funds may need to cut US stock allocation by roughly 14 percentage points following Friday’s rout. That can materially impact near-term price action when moves become extreme.” (Would be the biggest one-day de-risking since February 6th).
• JPMorgan: Cut its near-term view on stocks from bullish to tactically cautious. “The markets are likely to remain choppy in the near-term, given that investors may continue to sell some of the tech stocks that surged during the recent rally.”
• Citi: According to its Equity Markets Positioning Model, it believes US equity positioning has become cleaner but still extended following last week's selloff.
• ING: “Fundamentals for the semiconductor sector continue to look strong due to the continued investment in AI data centres. However, investors may look to rebalance portfolios to make room for new investment opportunities, such as SpaceX, Anthropic and OpenAI.”

Looking Ahead:

• Middle East updates: Any concrete US-Iran ceasefire agreement would weigh on energy prices and help yields fall to reasonable levels.
• IPO sizings: Funds may have to allocate a larger portion to accommodate the new shares to their ETFs.
• Databricks Data + AI Summit (June 15th-18th): Features speeches from MSFT CEO Nadella, OpenAI President Brockman, Databricks CEO Ghodsi and others from the world’s largest tech companies.