Tech Weekly: Investors Flee Tech Sector on Earnings, CAPEX Spending

This week’s tech sector performance

Chip stocks led Wall Street gains in early trading on Monday (July 20), even as hostilities between the US and Iran intensified. Houthis said that day that they would impose a naval blockade on Saudi Arabia, but a senior Iranian official told Reuters that mediators had sent a proposal to de-escalate that would offer a 10 day ceasefire.

While all three major indexes closed lower on Monday, the tech-heavy Nasdaq Composite (INDEXNASDAQ:.IXIC) lost less than the S&P 500 (INDEXSP:.INX) and the Dow Jones Industrial Average (INDEXDJX:.DJI).

Adding pressure to US chip and artificial intelligence (AI) infrastructure stocks were reports that Chinese startup Moonshot AI had to pause new subscriptions to Kimi K3, its open-weight frontier model, due to overwhelming demand.

A sharp surge within 48 hours of the model’s July 16 release culminated in the subscription pause on July 19. Reports also surfaced about the company’s plans for an initial public offering in Hong Kong.

The market reaction was centered on worries that stronger, cheaper Chinese AI models could pose a threat to US dominance and challenge the economics of the current AI spending boom.

In addition, political figures and executives debated whether to respond with procurement rules, export controls or other measures that would create compliance risks for enterprises using Chinese AI.

While some have argued that such regulation would create unnecessary fear and slow US innovation, others believe the government would eventually need to increase regulatory pressure around open-weight Chinese systems.

Tuesday (July 21) brought positive sentiment, with stocks rising in early trading and closing up. A continued semiconductor recovery and a rally in IT shares provided support to the Nasdaq, which closed 1.29 percent higher. New 50 percent tariffs on a broad set of Canadian goods were a major part of the macro backdrop.

Global markets were mixed, and Wall Street futures were in the red ahead of earnings for Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) on Wednesday (July 22). Both big-name tech stocks slipped in after-hours trading in a clear signal from Wall Street that AI spending needs to start generating results.

Alphabet reported accelerating cloud growth, and core search advertising remained resilient, but full-year CAPEX projections climbed toward US$205 billion, bringing free cashflow into negative territory.

Tesla, on the other hand, saw its profitability take a big hit as price cuts and incentives squeezed gross margins alongside rising CAPEX on the company’s Full Self-Driving, Cybercab and Optimus components.

Vehicle deliveries hit a Q2 record, however, and total revenue rebounded year-on-year.

On the flip side, Super Micro Computer (NASDAQ:SMCI) was the top gainer on the S&P 500 for the day, rallying a strong 19.8 percent after reporting over US$60 billion in new orders.