JPMorgan believes the semiconductor sector is becoming increasingly vulnerable to bouts of sharp volatility as investor positioning reaches elevated levels and valuations continue to stretch.
In a research note on Thursday, analyst Nikolaos Panigirtzoglou warned that rising volatility combined with concentrated exposure is “raising the risk of more frequent semiconductor ‘VaR shocks’ from here,” pointing to the early-June selloff as an example of how quickly market conditions can deteriorate.
The bank identified concentration as one of the biggest risks facing the sector. As semiconductor stocks occupy a larger share of global equity indices, Panigirtzoglou said their weight “can become binding for funds with self-imposed risk limits,” potentially triggering forced reductions in exposure during periods of stress.
Valuation is another area of concern. JPMorgan noted that semiconductor companies now command a market-capitalization-to-revenue ratio within global indices that exceeds six times, a level significantly higher than that of the Magnificent Seven stocks in the S&P 500 when Broadcom is substituted for Tesla.
The bank also highlighted a potential catalyst for volatility in the near term. End-of-quarter and end-of-month portfolio adjustments could result in roughly $165 billion flowing out of equities and into bonds, creating additional pressure on sectors that have become heavily owned by investors.
Outside equities, JPMorgan pointed to growing risks in digital assets. The bank observed that bitcoin mining profitability has become increasingly dependent on cryptocurrency prices, suggesting that a larger share of miners are operating close to break-even levels.
JPMorgan concluded that while concentration has historically supported momentum during powerful rallies, the semiconductor sector’s current combination of rich valuations, crowded positioning and elevated volatility leaves it increasingly exposed to sharper market swings.
Leave a Reply