Semiconductor stocks led Wall Street lower overnight, dragging Nasdaq 100 futures sharply lower during Asian trade. The weakness spilled into Asia, with Japan's Nikkei falling around 3%, although the KOSPI was closed, leaving one of the region's key semiconductor benchmarks absent from the session.
The timing is notable, with the Nasdaq entering a pivotal earnings season that will determine whether the recent AI-led rally can be sustained.
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Nasdaq Futures Flash Bearish Technical Signals
At the time of writing, Nasdaq futures are testing last week's low, teasing the potential for a bearish engulfing week. Note that a bearish divergence formed in the overbought zone of the RSI (14) ahead of the record high, while a bearish weekly close would also establish a lower high, hinting that further losses could lie ahead. Keep in mind that a bearish Nasdaq is also likely to weigh on sentiment across the S&P 500 and Dow Jones, although the Dow has generally outperformed Wall Street and may therefore be less appealing to bears during a pullback.
Nasdaq Breaks Out of Compression
The daily chart shows momentum turning lower from a compression pattern, while the daily high-to-low ranges have begun to expand. Prices are now below both the 50-day EMA and the 29,000 level, although they remain above last week's low for now. If sentiment remains fragile, a move towards the June low and the 100-day EMA just above 28,000 could be on the cards.
Source: CME, TradingView
Semiconductor Weakness Takes Centre Stage, Earnings Also in Focus
The latest bout of selling was led by semiconductor stocks, with the weakness spilling over into Nasdaq futures and weighing on broader risk sentiment. Several prominent chipmakers have rolled over from recent highs, pointing to broad-based weakness rather than isolated selling.
While one weak session does not necessarily signal a trend reversal, semiconductors have been the market's leadership group throughout the AI boom. If the sector continues to underperform, it will be difficult for the Nasdaq to regain its leadership until buyers return.
Source: NASDAQ, TradingView
The AI Supply Chain Faces Its Next Test
Attention now turns to earnings, which will determine whether this week's semiconductor-led pullback proves to be a temporary shakeout or the start of a broader correction. While technical signals have deteriorated, company guidance over the coming weeks is likely to carry greater weight than chart patterns, particularly given the lofty expectations surrounding AI-driven growth.
Investors will be looking for confirmation that demand remains robust across the AI supply chain, from hyperscalers investing in data centres to semiconductor designers and equipment manufacturers. Capital expenditure plans, cloud growth, AI monetisation and forward guidance will be scrutinised for any signs that the pace of investment is beginning to moderate.
Investors will be watching the AI supply chain closely, including:
- Alphabet (GOOGL) – cloud growth, AI monetisation and capital expenditure
- Microsoft (MSFT) – Azure demand and AI investment
- Meta Platforms (META) – AI spending and advertising trends
- Amazon (AMZN) – AWS growth and infrastructure spending
- Nvidia (NVDA) – AI chip demand and forward guidance
- AMD (AMD) – AI accelerator demand
- Broadcom (AVGO) – AI networking and custom silicon
- Intel (INTC) – PC demand and foundry progress
- Lam Research (LRCX) and Applied Materials (AMAT) – semiconductor manufacturing investment
Strong guidance across these companies would suggest the recent weakness is little more than profit-taking ahead of earnings. Conversely, any signs of slowing AI demand or softer capital spending could validate the recent deterioration in semiconductor shares and weigh further on the Nasdaq.
Can Earnings Revive the AI Trade?
The Nasdaq enters earnings season at a pivotal technical juncture. A bearish outside week, weakening daily momentum and semiconductor-led selling point to increasing caution among investors.
Whether the decline extends from here will likely depend less on the charts and more on whether upcoming earnings continue to justify lofty AI valuations. Strong guidance from hyperscalers and chipmakers could quickly restore confidence in the AI trade, while disappointing outlooks would reinforce the recent shift towards risk aversion.
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
