RBC Cuts Technology Sector Rating as Chip Earnings Momentum Slows

RBC Capital Markets lowered its rating on technology stocks on Oct. 14, citing slower upward earnings estimate revisions for semiconductor companies and a risk of further weakness in the sector.

The bank moved technology from overweight to market weight and recommended health care. RBC U.S. equity strategy head Lori Calvasina said revisions for the broader technology sector remained strong, but their pace had begun to slow for companies in the Russell 3000 semiconductor and semiconductor equipment industry. A further deceleration would be a negative signal for performance and could indicate another leg down.

Semiconductor funds declined on Oct. 14. The iShares Semiconductor ETF (SOXX) fell nearly 3%, was down more than 5% for the week and traded more than 19% below its 52-week high from late June. The VanEck Semiconductor ETF (SMH) fell more than 2% and was down 5.5% in October.

Despite the recent declines, Micron had gained 105% and Sandisk was up 57% over the past six months.

Deutsche Bank warned last Friday that the technology rotation that began in July had advanced substantially, leaving a less favorable near-term risk-reward balance. A shift toward other sectors could broaden market performance but might also accompany a wider sell-off.

The debate also centers on whether companies will earn adequate returns from artificial intelligence infrastructure spending. The timing of a slowdown in that capital-spending boom remains vague.