NVDA NVIDIA Corporation

By Jessica Menton 

Global trade tensions have pummeled shares of highflying semiconductor companies like Advanced Micro Devices Inc., Micron Technology Inc. and Nvidia Corp. over the past two months. More pain may still be to come.

Investors are looking to the G-20 summit that starts Friday for updates on trade talks with China, and any further pressure on chip stocks could spell more trouble for the broader market. That is because chip stocks often lead the S&P 500 on the way up and the way down.

The broad stock-market index and the semiconductor group, which currently makes up 3.2% of the index, have a correlation of 0.94, according to FactSet, going back to the beginning of 2016 when chip stocks began their steady ascent.

Correlation is measured on a scale of minus-1 to 1. A reading of minus-1 means two assets are moving perfectly in opposite directions, while a correlation of 1 means they are moving perfectly in tandem.

The PHLX Semiconductor Index, up 86% since the beginning of 2016, has tumbled 9.9% from the start of October as shares of chip companies have been caught in the crosshairs of escalating China-U.S. trade tensions. Chips are used in several hot areas of growth: data centers, gaming and artificial intelligence.

Despite a 31% slide since Oct. 1, AMD shares are still the S&P 500's best-performing stock this year, with a gain of 108%. Micron shares have tumbled 14% from the beginning of last month, pushing them into the red for the year with a decline of 5.9%. And Nvidia shares, which have lost 43% of their value since early October, have plunged more than 20% in the past two weeks alone in the wake of a disappointing earnings report.

The PHLX index has underperformed the broader S&P 500, which has shed 5.8% since the beginning of last month. The sector, though, has gotten some relief this week, with the PHLX index rising 2.3% Wednesday in a broad market rally.

More clarity about their path going forward should come after President Trump's trade talks with Chinese President Xi Jinping in Buenos Aires later this week. Mr. Trump has said it is "highly unlikely" that he would hold off on his existing plans for raising tariffs on $200 billion of Chinese imports, and that if no deal came from the meeting he would order additional levies on other Chinese goods. That would likely include Apple Inc. iPhones and laptop computers, both powered by semiconductors.

"Investors want to see whether the tariff bark is worse than the bite," said Daniel Ives, Wedbush Securities managing director and equity analyst.

Some investors, though, see the recent slide in chip stocks as a chance to pick up shares on the cheap. James Wang, analyst at ARK Invest, said his firm has been buying Nvidia shares this month. He points to expectations of strong revenue growth in the coming years, driven by artificial intelligence and autonomous driving.

"For us, Nvidia was a very obvious buying opportunity," Mr. Wang said, adding that excess inventory concerns surrounding the company are only relevant for the next few quarters. "It's hard to see how in three to five years this issue would still be relevant by then."

The company's forward price-to-earnings ratio was 22.8 as of Monday, down from 42.1 at the start of the year, while the S&P 500's ratio was down to 15.3 from 18.1, according to FactSet.

JJ Kinahan, chief market strategist at TD Ameritrade, also cited recent interest from clients in Nvidia, helped in part by its cheaper valuation and the holiday shopping season, which is expected to help boost technology shares amid increased demand for electronics.

Among the top five stocks traded by TD Ameritrade retail clients on Black Friday were Apple, Amazon.com Inc., AMD, Nvidia and Netflix Inc., according to Mr. Kinahan.

As chip stocks have faced demand worries, Wedbush's Mr. Ives said he has noticed a growing trend of investors rotating out of semiconductor stocks and into software stocks such as VMware Inc. and Palo Alto Networks Inc., which have exposure to the cloud or cybersecurity and have delivered strong earnings.

Another tech giant that has benefited from the move to the cloud: Microsoft Corp., which briefly eclipsed longtime rival Apple as the world's most valuable company earlier this week.

"Microsoft isn't sexy, but it's an impressive story," Mr. Kinahan said, referring to how the company changed its business model in recent years to pivot toward cloud computing.

"The cloud business continues to heat up," he said. "Microsoft made a bet there, and that bet is paying off."

To receive our Markets newsletter every morning in your inbox, click here.

Write to Jessica Menton at Jessica.Menton@wsj.com

(END) Dow Jones Newswires

November 29, 2018 08:14 ET (13:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.