Software Stocks Surge as Chip Stocks Slide: Record Market Divergence

Software stocks have gained sharply since June while semiconductor shares have fallen, creating the widest software-over-chips gap in ETF history.

Software stocks and chip stocks have been moving in very different directions for the last several months, marking one of the biggest divergences to occur in the tech industry. While software stocks have been heading towards record highs, semiconductor stocks are still struggling to recover from their lows, with only Nvidia being an exception among chip stocks. The divergence has been going on since June 22 when chip stocks hit their all-time highs while software stocks were beginning to recover.

Nearly 50-point gap between software and chips

The difference is quite evident especially considering the equal-weighted ETFs. SPDR S&P Software & Services ETF (XSW) has risen about 24% since June 22, while SPDR S&P Semiconductor ETF (XSD) has lost about 24%. This marks a difference of nearly 50 percentage points, which is the biggest difference between software and semiconductor since the ETFs began in 2011. This also applies to the company level. Out of the 45 software companies listed on a basket in Yahoo Finance, 37 have risen since June 22. In contrast, 59 out of 60 semiconductor companies have declined.

Billions shift between technology sectors

The scope of the transition has been huge. Just Microsoft alone has gained almost $900 billion in market capitalization during this year. On the other hand, companies such as Micron Technology, Taiwan Semiconductor Manufacturing Company, Arm, and AMD have lost almost $950 billion in market capitalization. In the broader comparison, the software sector has gained almost $1.5 trillion, whereas the semiconductor industry has lost almost $2.6 trillion.

Software recovery gains momentum

The head of technical strategy at Fundstrat, Mark Newton, thinks that software stocks could already have done most of their corrective work and be ready for a rebound. A number of large software stocks hit their lows on or about June 22. Salesforce hit its low on June 22, while Adobe, ServiceNow, and Microsoft hit their lows in the next few sessions after June 22. The semiconductor industry, however, kept falling, with Micron hitting its high on June 25.

Nvidia remains an exception

Even with the broad-based semiconductor stock market selloff, Nvidia has been different from the rest of the semiconductor stocks. For nearly four months now, Nvidia stock has basically moved sideways, while other semiconductor stocks have been experiencing massive falls. This has made the upcoming earnings report by the company very crucial. Nvidia is expected to release its earnings report tomorrow, and it will give the market an opportunity to see how resilient Nvidia is amid the difficulties facing the entire semiconductor industry.

Investors watch technology outlook

The surprising divergence between the performance of the two categories of stocks reflects the shifting expectations in the tech world. Whereas semiconductor firms have come under selling pressure, software stocks have been on an uptrend due to rising expectations regarding growth in earnings. Analysts continue to be wary of declaring that the semiconductor decline is coming to an end. Newton thinks that technology will continue to be a major driving force behind the performance of the market and expects the semiconductor stocks to recover at some point in time.