Nvidia, AMD shares see their rallies cool. Will software stocks soon get their moment?

By Emily Bary

Chip stocks have gained at the expense of software names recently

After three days of red-hot gains, Nvidia Corp.'s stock is seeing its rally cool, but not to the degree of some other names in the chip sector.

Nvidia shares (NVDA) had risen about 20% across the prior three sessions, but they're down fractionally in Wednesday morning trading. That puts a stall in the company's bid to reach a $3 trillion market capitalization or pass Apple Inc. in the valuation ranks: Apple shares are up about 1%.

Other chip stocks are under greater pressure than Nvidia's in Wednesday's trading action. Shares of Advanced Micro Devices Inc. (AMD) are off nearly 4%, while shares of chip designer Arm Holdings PLC (ARM) are down more than 3%. Marvell Technology Inc. shares (MRVL) are down more than 2% and Qualcomm Inc. shares (QCOM) are down more than 1%. The PHLX Semiconductor Index SOX is down almost 2%.

Wednesday's chip-sector declines come after a sharp rally in Tuesday's session that Mizuho desk-based analyst Jordan Klein said "seemed like a blow out of the rotation or trade that has been underway all [year] long." He meant that money was going into chip stocks, especially those levered to artificial intelligence, at the expense of software stocks.

Is it time for software stocks to shine? There are several big earnings reports today, including from Okta Inc. (OKTA) and Salesforce Inc. (CRM) But Klein noted that recent "reactions to what looks like improving consumption software earnings" haven't sparked a rotation into small- and medium-sized growth software plays.

"Given the [Workday] results and negativity towards software in general, we do not see a ton of upside optionality into [Salesforce's] print," Evercore ISI analyst Kirk Materne wrote.

Another factor that has the potential to impact the software sector is Friday's April U.S. inflation report, which could affect interest rate trends. "So software investors likely playing a lot more DEFENSE vs OFFENSE on worry anything cautious, disappointing or negative could create a further unwind of money leaving the group," Klein said.

While the PHLX Semiconductor Index is up 10.9% over the past three months, the iShares Expanded Tech-Software Sector ETF IGV is down 4.5%.

It "sort of looks and feels to me like the focus on AI, stubborn inflation in the U.S. in services sector and some uncertainty in corporate earnings into [calendar 2025] will potentially keep software as a broader sector from roaring back to lead the tech tape in [the second half of 2024]," Klein wrote.

-Emily Bary

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05-29-24 1143ET

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