(July 22): Wall Street staged a comeback as dip buyers emerged, boosting stocks amid a rally in chipmakers on bets the artificial-intelligence trade that’s powered the bull market has more room to run.

Investors kept piling into beaten-down semiconductor firms, with a key sector gauge up 5.2%. The Nasdaq 100 added 1.9%. Nvidia Corp said its latest chip designs are making their way to customers. Intel Corp climbed on plans to cut more jobs. In late hours, Super Micro Computer Inc jumped as its preliminary outlook showed a rising order backlog. The revival in risk appetite defied higher oil prices that stoked worries about inflation, lifting bond yields.

The stock market’s best-performing corner this year has been gripped by intense volatility, with traders gauging whether the massive AI spending will pay off. An opportunity to start rebuilding positions in chipmakers could emerge as the slide in momentum stocks nears its end, according to UBS’ trading desk. 

Part of the reason the sector may be finding a floor is that much of the speculative positioning has already been unwound. Hedge funds have cut long positions in momentum and semiconductor shares by about 5% of gross market value, one of the largest reductions on record, according to UBS’ prime brokerage data.

“The long-term AI backdrop appears to be intact,” said Adam Turnquist at LPL Financial. “The recent correction appears more consistent with a healthy reset following a parabolic advance than a fundamental breakdown in the AI investment theme.”

Still, with scepticism mounting about the vast sums being poured into data-centre development, the upcoming tech results will be highly scrutinised. Tesla Inc and Alphabet Inc kick off the megacap reporting season on Wednesday. Microsoft Corp, Meta Platforms Inc, Apple Inc and Amazon.com Inc hit the following week.

The period will be a defining stretch for earnings, and not just for tech. The broader message is: Companies that fail to clear Wall Street’s elevated bar are being punished, according to Bret Kenwell at eToro.

“The burden of proof has changed. Investors are no longer asking whether companies can withstand the uncertainty,” he said. “They want growth and guidance strong enough to justify elevated valuations.”

Overall, the nascent earnings season has been solid. More than 90% of the S&P 500 companies reporting results so far have beaten profit estimates, according to data compiled by Bloomberg.

“We see room for global stocks to move higher amid strong profit growth,” said Mark Haefele at UBS Global Wealth Management. “The wide gaps between individual stock performance and ongoing risks related to geopolitics and inflation, however, mean that investors should ensure diversified exposure.”

Uploaded by Isabelle Francis