Markets Hesitant Ahead of First AI Earnings

After a strong performance last week, equities are softer ahead of key tech-sector earnings reports, with the SK Hynix IPO leaving the market with a sour aftertaste.

Factors Moving the Market

• Markets are in a holding pattern ahead of key tech earnings and other risk events this week after profit-taking among memory stocks.
• ASML is expected to report earnings growth and provide commentary on AI chip demand.
• TSMC reported record sales with a focus on KPIs to assess whether the chip market remains resilient.
• Seagate Technologies might report this week as the first major memory firm of the season.

Testing the AI Hype

Big tech bolstered stocks last week, AI stocks helped the Nasdaq outperform its peers, and investors cheered the debut of South Korean chipmaker SK Hynix. After its American IPO, the Seoul-based company jumped 17%, leaving markets with renewed hope in AI-backed stocks. However, early Monday, the firm reversed those gains, dropping 15% during the Asian session, along with Samsung's shares. The Kospi fell 9%, triggering a 20-minute halt and firing a warning shot about tech stock performance. Sentiment was further hurt by geopolitical concerns after US President Donald Trump formally resumed the war with Iran, reinstated the blockade of its ports, and suggested charging a 20% "protection fee" to transit the Strait of Hormuz. Brent shot up to over $85 per barrel in the aftermath.  With a risk-heavy week that includes US CPI data and the unofficial start of the second-quarter earnings season, traders are taking a cautious approach.

Taking centre stage are a handful of AI-leading companies that could provide insight into the evolution of the tech trade. Recently, the focus has been on memory firms such as Micron and SK Hynix. Those firms have come under pressure ahead of earnings season, but they've posted an impressive year-to-date run-up. Micron shares are up 200% since the start of the year, for example. This sets a high bar for earnings to meet and could make traders nervous ahead of their reports later in the month. Traders will likely look at this week's tech earnings to see whether they meet expectations and whether that sets the tone for this earnings season. Notable names reporting include chip equipment manufacturer ASML, chip manufacturer TSMC and memory chip producer Seagate. These firms are generally regarded as leaders in their fields and will likely offer an understanding of how the broader market is performing.

Traders Looking For ASML Demand

The Dutch lithography company will report earnings before the market opens on Wednesday and is anticipated to report sales rising 15% to €8.87 billion. As the leading supplier of machines to make the most advanced processing chips, the company's earnings are often seen as a proxy for AI development. Last quarter, the company spurred investor confidence after raising its earnings outlook. Its order backlog and bookings are likely to be the key focus for investors, along with potential updated guidance for Q2.

TSMC Seeing Record Demand

The Taiwanese AI chipmaker will report earnings early on Thursday, following its Monday update on June sales. Q2 sales jumped 36% from a year earlier, maintained by resilient AI demand. Traders will be closely watching Thursday's report for key performance metrics that could confirm AI demand is solid or growing. That could be reflected in the company's guidance (previously it saw sales up 30% this year) and in its plans for capital expenditure. Management commentary on the state of AI demand will likely be key for tech sentiment.

Will Seagate Match Momentum?

The memory manufacturer is expected to report earnings on Thursday after the market closes (but has not yet confirmed). Earnings are anticipated to nearly double to $5.09 from $2.59 a year earlier, with sales rising 43% to $3.49 billion. As the first major memory firm to report this season, it could be considered a bellwether, given that similar stocks have doubled over the last six months. Traders will likely focus on the company's margins to gauge pricing power and on guidance to gain insight into market demand projections. 

Nasdaq Tightening Hints at Breakout

This week could be pivotal for Nasdaq’s price trajectory, especially given that it currently consolidates in what appears to be a pennant or triangle pattern. The lower VWAP line at 28890 might come into focus if AI earnings disappoint, with a break of 28680 exposing the swing low at 28200. Revisiting the major support would invalidate the tightening formation. On the other hand, if the first run of AI stock earnings beat expectations, Nasdaq could accelerate past 30K and the upper VWAP line at 30260. If 30660 and 30760 yield to potential bullish momentum, this could pave the way for record highs.

Source: SpreadEx | Nasdaq, Daily Chart