The S&P 500 pauses after a surge, as the market holds its breath for key data week

After experiencing a strong rebound recently, the U.S. stock market fell into silence on Monday, with the S&P 500 index slightly retreating after reaching a historic high, as investors remained cautiously observant ahead of the "key data week."

The market is currently facing a game of multiple signals: on one hand, there is a recalibration of corporate earnings expectations, while on the other hand, the escalating memory chip supply crisis is reshaping the landscape of winners and losers in the tech sector, casting a shadow over overall market sentiment.

As the new earnings season enters deeper waters, supply chain tensions, particularly the surge in memory chip prices, have moved from behind-the-scenes discussions to the forefront, becoming a high-frequency term in many corporate earnings call meetings. This cost pressure is spreading across a wide range of industries, from consumer electronics to automotive manufacturing, directly threatening corporate profit margins. Market participants are trying to assess the duration of this supply bottleneck and its long-term impact on inflation and corporate earnings, and this uncertainty has led traders to hit the "pause" button ahead of key economic data releases.

Meanwhile, there is a stark divergence in stock price performance between memory chip manufacturers and downstream consumer electronics giants.

Although the S&P 500 index remains stable overall, the "super cycle" in this segment is prompting a reallocation of capital, with funds rapidly flowing from hardware manufacturers facing profit squeezes to chip suppliers that hold pricing power. This structural rotation of funds highlights the market's heightened concern over supply chain resilience and suggests that future volatility may intensify.

Current market valuations have, to some extent, absorbed expectations that supply tightness will ease in the short term, but as more industry giants issue warnings, this optimistic sentiment is facing challenges. Investors are closely monitoring the macroeconomic data set to be released this week, as well as earnings reports from companies like Datadog and Cloudflare, to seek further clues about the health of the demand side and cost pass-through capabilities, which will largely determine the future trajectory of U.S. stocks.

The Gap Between Winners and Losers Widens

The relentless rise in memory chip prices over the past few months has drawn a clear line in the stock market.

Since the end of September, Bloomberg's index tracking global consumer electronics manufacturers has fallen by 10%, while the basket of memory manufacturers, including Samsung Electronics, has surged by about 160%. From gaming console maker Nintendo to major PC brands and suppliers to Apple, a series of companies have seen their stock prices plummet due to profitability concerns, while memory producers have soared to unprecedented highs.

Fund managers and analysts are assessing which companies can best cope with this squeeze by locking in supply, raising product prices, or redesigning products to reduce memory usage.

Vivian Pai, a fund manager at Fidelity International, pointed out that the currently underestimated risk lies in the duration, as current valuations largely assume that this disruption will normalize in the next one or two quarters. However, the firm believes that the industry's supply tightness may persist, potentially throughout the year.

Frequent Corporate Warnings, PC Manufacturers Hit Hard

Memory shortages and pricing issues are frequently appearing in corporate earnings reports and conference calls.

Honda Motor pointed out on Tuesday that the supply risks of memory components are becoming apparent. Qualcomm's stock fell more than 8% last Thursday after the smartphone processor manufacturer hinted that memory constraints would hinder mobile phone production. Nintendo's stock recorded its largest drop in 18 months in the Tokyo market the day after warning of profit margin pressures due to shortages.

PC manufacturers have been hit the hardest. Lenovo and Dell have both fallen more than 25% from their peak in October last year. Market concerns that higher chip prices will suppress PC demand have also spread to Swiss peripheral manufacturer Logitech, whose stock has dropped nearly 30% from its peak in November.

AI-Driven "Super Cycle"

Charu Chanana, Chief Investment Strategist at Saxo, stated that memory prices have become the headline news of this earnings season, with the market generally aware of the supply tightness, but the timeline for this tightness is beginning to be questioned.

This concern is not limited to demand and earnings; it has been exacerbated by the massive spending of U.S. hyperscale companies on AI infrastructure, which will further worsen the memory chip shortage. The large-scale AI infrastructure construction led by companies like Amazon.com Inc. has shifted capacity from traditional DRAM to high-bandwidth memory.

This has led to what some describe as a "super cycle," breaking the usual boom and bust pattern of memory supply and demand.

Despite the continued weak demand for end products like smartphones and cars, spot prices for DRAM have soared over 600% in the past few months. Additionally, AI is creating new demand for NAND chips and other storage products, driving up costs in these segments.

Against this backdrop, memory chip manufacturers have become the winners among tech stocks.

SK Hynix, a key supplier of high-bandwidth memory to Nvidia, has seen its stock price in Seoul rise over 150% since the end of September. In Japan, Kioxia and Taiwan's Nanya have each risen over 270% during this period, while SanDisk's stock has increased by more than 400% in New York.

Jian Shi Cortesi, a fund manager at GAM Investment Management, noted that the current cycle has exceeded previous cycles in both length and magnitude, and there are no signs of demand momentum weakening.