Palo Alto Networks, Salesforce shares lead the S&P 500 as Nvidia rally cools

By Emily Bary

A Mizuho analyst is intrigued by what he views to be a rotation into the software sector as the chip trade fades

As Micron Technology Inc., Nvidia Corp. and other chip stocks lose momentum Thursday, the software sector is getting a nice boost.

Micron's (MU) latest earnings are weighing on the chip sector in Thursday action, after the company's outlook failed to live up to the hype. The company's revenue outlook only met expectations, as the company doesn't have enough supply to meet roaring demand.

"This mirrors precisely what is going on at Nvidia which is also running as hard as it can to meet demand but where revenues are likely to be determined by how much capacity it has reserved at TSMC as the phones are still ringing off the hook," wrote Richard Windsor, an independent analyst at Radio Free Mobile, who has positions in both Nvidia and Micron.

Read: Nvidia is 'both king and kingmaker,' and these chip stocks could pop in its wake

Shares of Micron are down 7.6% in Thursday trading and among the S&P 500's SPX biggest losers, while Nvidia shares (NVDA) are down 2.0%.

Micron "is a direct read for consensus AI [semiconductor]/hardware longs," wrote Mizuho desk-based analyst Jordan Klein.

But he's most intrigued by what he views to be a rotation into the software sector. Software stocks haven't been very loved on Wall Street lately, as those companies face customer spending pressures and have been slower than chipmakers to show AI-fueled revenue boosts. Now, however, there's "real money" piling into mega-cap technology names outside the semiconductor sector.

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He flagged Palo Alto Networks (PANW) as one name with a "fantastic" chart. The stock has been staging a comeback after a sharp February drop, and it's up 5.3% in Thursday's midday action - good for the second-best performance in the S&P 500 at recent check.

Other software stocks are making sizable moves higher as well. These include shares of Zscaler Inc. (ZS), up 5.7%, and Salesforce Inc. (CRM), up 5.8%. Salesforce is the S&P 500's leading gainer as of midday.

Shares of Adobe Inc. (ADBE) are ahead more than 3%, and the iShares Expanded Tech-Software Sector ETF IGV is up more than 2%.

Klein says investors need to see in-line to weaker inflation numbers tomorrow but given the pullback in chip stocks, he expects the broader tech sector to act well, with "no big fear or rotation away."

Kirk Materne of Evercore ISI was somewhat measured in discussing the software-sector outlook. "While there appears to be a little more buy-side interest in the space over the last couple of weeks, we expect that getting through July without any major surprises is going to be the key to building some momentum," he wrote.

-Emily Bary

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06-27-24 1227ET

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