Bullish Surge: Chip Stocks Propel Market Rally! [Learn Premium Weekly Review]

On Tuesday, Fed Governor Christopher Waller, who’s known for his hawkish stance, said we're pretty close to that 2% inflation target. But he also threw in a word of caution - no rush on cutting rates until we’re certain inflation’s on a steady decline. We need to be careful and systematic in our approach. Then Wednesday rolled out the December retail sales, and guess what? They were up by 0.6%, more than expected – the biggest surge in three months. Normally, that'd be good news, but it put a damper on the urgent rate-cut chatter.

Despite the dip in rate cut expectations for March, the big stock indices are still looking pretty strong. Part of that is because a rate cut sometime in 2024 seems almost certain – it's just a question of when. Plus, with Nvidia and Intel launching new AI PC products and analysts giving $Advanced Micro Devices (AMD.US)$ an upgrade, there’s this huge wave of excitement about AI exploding into everyday tech. That enthusiasm fired up investors, and the $PHLX Semiconductor Index (.SOX.US)$ has shot up nearly 7% in just two weeks.🔥

1. TSMC's earnings lit the fuse for a new surge in AI stocks.

On Thursday, January 18, $Taiwan Semiconductor (TSM.US)$ - the world's largest chipmaker - smashed expectations, reporting a fourth-quarter revenue of 625.5 billion Taiwanese dollars and a profit of 238.7 billion Taiwanese dollars. They're predicting solid growth for the first quarter of 2024, with an annual revenue increase of over 20%.

As a major supplier to U.S. chipmakers and Apple, TSMC's reports are promising signs of a rebound in smartphone and computing demand, also confirming the recent hype around AI applications. Some analysts believe that by 2027, AI chips could make up over 10% of TSMC's revenue. Riding on this news, TSMC's stock soared by 9.79%.

With optimism about AI chip demand, chip and tech stocks saw a significant jump, boosting both the S&P and Nasdaq indexes: the S&P closed up by 0.88%, while the Nasdaq climbed 1.35%. The Philadelphia Semiconductor Index outperformed, finishing about 3.4% higher. AMD and Nvidia, key downstream players supplied by TSMC, each set new highs, with gains of 1.56% and 1.88% respectively.

2. Mixed blessings in bank earnings

Reviewing the bank earnings, high-interest rates seem to put banks between a rock and a hard place. Wall Street's big guys didn't quite hit the mark last quarter: the major six banks all saw their net profits slide significantly, lower than expected. Bank of America's profits plummeted by 55%, and $Citigroup (C.US)$ faced an unexpected loss. Plus, with Fed rate cuts on the horizon this year, the banks could be staring down a "rate cut crisis": bank execs are saying that net interest income, a major revenue chunk, is likely to dip this year.

However, with market participants holding out hope for a soft landing of the U.S. economy in 2024, there were some silver linings in the big banks’ performances. Despite increased provisions for loan losses, delinquency rates are still below the historical average; banking execs remarked that the U.S. consumer condition remains robust, albeit with a "cautious" outlook. Slowing inflation, potential rate cuts later this year, and whether the economy can dodge a recession remain key issues hovering over the market.

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