Market Talk Memory chip supercycle won t last for ever

Chip stocks are in focus again as SK Hynix makes its debut. South Korean chipmaker SK Hynix launches its US-listed shares on the Nasdaq this Friday after a week that has seen some wobbles in the hugely popular chipmaker trade. The company's South Korean shares are actually down a quarter since their record high two weeks ago, although they're still 650% up in the last year. Chris Rosbach is a managing partner at Jay Stern & Co. Chris, do you still see huge investor appetite for semiconductors or is doubt creeping in? Well, I think that is very much a question of what sentiment is. We're very convinced about the potential for AI. We're convinced that we need the computing capacity to be able to process it. And so a lot of data centers are going to be built and those are going to need a lot of chips. But it really matters which ones. The NVIDIA chips are absolutely essential. There's other form of chips, including memory and others that are of great importance. But ultimately, memory is commodified. It's in an absolute super cycle. We see that in the companies. We see it in their earnings and we see it in their share prices. But that is not going to last forever. So these massive moves that we've seen have to be taken with caution. And I think the fact that investors are pausing and thinking, are these prices really sustainable, is something that's going to carry on. Well, next week is a huge one on the earnings calendar, with all the big banks reporting after a very busy quarter for dealmaking. How high are expectations? I think they're pretty high. It's obviously been an incredible year for banks in particular, both in terms of M&A, which in many places is at record highs as companies are deploying capital, as there's an absolute race for investing in AI and in computing capacity, really across the value chain. And there's a lot of private equity capital that gets put to work that generates high fees for banks. And then there's the IPOs and the placements, starting with SpaceX. So it's been an incredibly strong year for placements with the markets that we have. But I think expectations are high. And after the rally that we've seen over the last 12 months in bank stocks, a lot of valuations are now at full levels as well. And so I think we're going to have to see whether the expectations are actually going to be met and whether they are going to be able to drive those share prices higher. More broadly, do you think this upcoming earnings season can keep up with the pace that was set last quarter? The underlying economy is doing really well. I think we see that in the US, but we're also seeing it in Europe and elsewhere. In particular, consumer demand has been keeping up, even though it's clearly squeezed by the concerns around the conflict with Iran, by the spike in oil prices, by the spike in gas prices, especially in the US, we just had earnings reports that have just highlighted that, and the concerns around inflation, because we've gone from an environment in which we expected rates to go down to flat to now potentially up even in the US. So that's a really hard moment for consumers, but they've been holding up. So I think we'll see whether the self-help and the growth for consumer stocks is going to lead to earnings that meet or exceed expectations. But industrial demand is extremely strong. Again, starting with computing capacity and data centers and related, but other infrastructure is doing very well as well. So we think we're confident on the underlying economy and confident on the underlying earnings, whether they're going to be strong enough to power the market higher or whether they will meet those expectations as we look forward to the second half of this year and into next and hopefully to an environment that's going to be better for business. Again, that's another question. Well, you mentioned the elephant in the room, the war in Iran. Markets seem to be shrugging off this week's resumption of airstrikes, but do you think we could still see energy supply worries drive inflation higher? I think one of the big questions, we've talked about it before, is how are these bottlenecks going to affect the global economy? Because it's oil, it's natural gas, which has been affected by the outages. That's actually good for infrastructure, of course, because, for example, that LNG plant in Qatar is a lot of business for Honeywell technologies. But fertilizers, other things are bottlenecking. But there's been a really resilient response by the economy, in particular, I think, from China in terms of oil freeing up capacity. And so we haven't seen the supply shocks that we might have otherwise expected. It looks like it's resilient, but it can't be excluded. And so I think there definitely is a worry. And the more that the conflict there can be in some way moderated, the more there can be some kind of an agreement. I think the better it is for the global economy. But it really is impressive how resilient supply chains have been and how both companies and companies, countries and companies, have been able to adapt to this challenge. That was Chris Rossback of JSTERN. Don't forget you can watch more videos on Reuters.com.