Reflecting on the 'Speed at Which Expectations Unravel' After the SOX Index Plunge [News x Investment Psychology]

What caught my attention this week was the sharp decline in the SOX index.

The SOX index is a commonly used benchmark for tracking the performance of U.S. semiconductor-related stocks.

That index saw a significant drop on Friday.

According to reports, the SOX index fell by more than 10% in a single day, and U.S.-listed semiconductor stocks appear to have lost a massive amount of market capitalization.

Semiconductor stocks have been viewed as a strong theme for some time.

AI, data centers, generative AI, capital investment.

When these words are lined up, one naturally wants to think, "Surely the semiconductor market rally will continue."

Looking at this sudden drop, what I thought about wasn't so much "is the semiconductor rally over?" but rather "how quickly expectations unravel when they do."

1. Why did the SOX index plunge?

This sudden decline is likely due to a combination of several factors.

One is that expectations for AI semiconductor demand were slightly shaken following Broadcom's earnings report.

Broadcom's earnings themselves were by no means weak.
Sales of AI semiconductors grew significantly, and the company indicated continued growth.

However, market expectations had risen even higher than that.

Because the outlook for AI semiconductor sales in the next quarter fell slightly short of market expectations, it seems to have been perceived as "not as good as expected."

Until now, quite high expectations had been baked into semiconductor stocks.

AI-related demand will continue to grow.
Data center investment will continue.
Semiconductor company earnings are also strong.

Such views have supported stock prices.

However, in a market with high expectations, ordinary good news is sometimes not enough.

Even with good earnings, it's not as good as expected.
Even with growth, it's not as much as expected.
Even with strong results, the market was looking for something even stronger.

When that happens, stock prices often react to the downside quite easily.

Another factor is that the U.S. employment statistics were strong.
Strong employment in itself is not bad news for the economy.

However, it is sometimes perceived a bit differently in the market.

Employment is strong.
The economy is resilient.
Inflation is also likely to persist.

When that happens, the view emerges that high interest rates might be prolonged.

As this view spreads, growth stocks in particular become weighed down.

Many semiconductor stocks have strong expectations for future growth priced in.

Therefore, when there is caution regarding rising interest rates or a change in the outlook for expected growth rates, stock prices tend to move significantly.

The recent sharp drop in the SOX index was, rather than simply 'semiconductors becoming weak,'

High expectations. Too much capital gathered. Caution regarding rising interest rates. Disappointment at failing to meet expectations.

I think it was a movement where these factors overlapped, leading to a sudden wave of selling.

2. The greater the expectations, the faster disappointment spreads

When watching the market, people gather around strong themes.

In recent times, I think AI and semiconductors are prime examples of this.

Strong stocks become even stronger.
Because they are rising, even more capital gathers.
Those who don't own them feel the anxiety of being left behind.

When this kind of trend occurs, there is a unique heat across the entire market.

'Won't it keep rising?'
'Won't it be bought even if it drops a little?'
'Won't AI demand continue for a long time?'

It becomes easy to think that way.

Of course, there is no need to deny the demand for semiconductors or the growth of AI itself.

In fact, investments related to AI and data centers may continue to be a major theme going forward.

However, what is difficult about investing is,

Being a 'good company' and how much the current stock price has already priced in expectations are slightly different matters.

No matter how good the theme is, if expectations build up too much, even a slight sense of unease can cause the stock price to fluctuate significantly.

What was thought to be 'still good' until yesterday can suddenly be viewed as 'surely too expensive' today.

That change is faster than you might think.
Seeing this recent sharp drop, that is what concerned me.

In the market, it takes time for expectations to build up.
But when expectations unravel, it happens much faster than you expect.

To put it a bit scarily, stock prices can sometimes move faster when expectations unravel than when they are rising.

That is precisely why, for strong themes, it is necessary to occasionally confirm:

'Is it truly strong?'
'Are expectations just too high?'
'What do I believe in when holding this?'

I believe these are things that need to be checked from time to time.

3. Even if you don't hold semiconductor stocks, the impact reaches you

This news is not just for those who directly hold semiconductor stocks.

Semiconductor-related stocks have a growing presence in the U.S. stock market.

Stocks like NVIDIA, Broadcom, AMD, and Micron are not only watched as individual stocks, but they also influence indices like the NASDAQ 100 and the S&P 500.

Therefore, when semiconductor stocks fall sharply, they can become a drag on the entire index.

Furthermore, if you hold investment trusts linked to such indices, you may be affected as part of the price movement even if you haven't bought semiconductor stocks directly.

'I don't hold semiconductor stocks, so it doesn't concern me.'

Even if you think that, if they are included in the index, you cannot think of them as completely separate.

Of course, this is not all bad.

When semiconductor stocks are strong, they also have the power to push up the entire index.

However, conversely, when the group of stocks at the center of the market is sold off, the entire index also becomes heavy.

Even if you are diversified, you are still affected by the themes at the center of the market.

Looking at this news, that is something I want to keep in mind once again.

The important thing is not to be more afraid than necessary, but totake a moment to separate and consider, 'How does this relate to my own assets?'I think that alone makes it easier to keep a little distance from the news.

I believe that alone makes it easier to keep a little distance from the news.

4. Things to look at before concluding that 'the semiconductor market is over'

When you see a sharp drop like this, there are words you hear immediately.

'The semiconductor market is over.'

Certainly, when it drops significantly in one day, it is natural to feel that way.

In particular, when a strong theme suddenly collapses, the investor's mind swings to the opposite direction all at once.

The peace of mind until yesterday turns into anxiety today.
The expectations until yesterday turn into doubt today.

This speed of switching is the scary part of the market.

However, I want to pause here for a moment.

It might be too early to decide the end of the market based on a single day's sharp drop.

This time, the SOX index fell significantly.

On the other hand, it is also a fact that it had been rising quite significantly until then.

A sudden adjustment after a strong rise.
That alone does not mean that a long-term theme has ended.

There are several things to check.

First, the content of the earnings.
Is the demand for AI semiconductors really weakening?
Or were expectations just too high?
This is something I want to look at separately.

Next, interest rates.
Will interest rates rise further?
Will they remain high?
Or is this reaction temporary?
For growth stocks, the impact of interest rates is quite significant.

And, where will the funds go after being sold off?
Has the flow of the market really changed?
Or is it just an adjustment for overheating?

This cannot be understood in one day.

I am impatient, so at times like this, I want to come up with an answer immediately.

Is it over?
Will it continue?
Is it a buying opportunity?
Is it time to get out?

However, the more you rush for an answer, the more easily you become swayed by your emotions.

Immediately after a sharp decline, the fact of the drop itself feels overwhelming.
It feels as though that decline will continue indefinitely.

Recent price movements leave a strong impression, making it seem as if they will continue into the future.
This is a feeling I want to be a little cautious about.

That is precisely why, in the days following a sharp drop, what you should look at is,

not 'whether it is over,' but'what has changed and what has not yet changed'I believe.

Has semiconductor demand itself changed?
Has the outlook on interest rates changed?
Were investor expectations simply too high?
Is it necessary to change even my own asset strategy?

Break it down and look at it in this order.

Even just doing that will slightly weaken the feeling of reacting reflexively to the news.

5. Memo to my future self next week

1. Even when seeing a sharp drop, do not immediately conclude that it is 'over'

When prices fall sharply, it looks as if the market landscape has changed all at once.
However, it is too early to judge the end of a long-term theme based on a single day's decline.
First, I want to look at earnings, interest rates, the movement of the index as a whole, and whether there is any buying back.

2. For strong themes, also confirm the level of expectations

I believe AI and semiconductors will continue to be important themes.
However, being an important theme is not the same as the current stock price being undervalued.
Prices don't rise even when good news comes out.
They fall sharply on slight disappointment.
At such times, it is possible that expectations had built up significantly.
I want to keep an eye not only on the strength of the theme but also on the height of expectations.

3. Keep an eye on whether the direction of capital is changing

After semiconductor stocks are sold off heavily, what I am curious about is where that capital will head. Will it end with temporary profit-taking? Or will capital begin to shift from AI and semiconductors to other sectors? This is something I want to watch in next week's market. By observing not just the sharp drop itself, but the subsequent flow of capital, I feel it becomes a bit easier to understand the market's temperature.

6. Conclusion

Looking at this SOX index plunge, I did not immediately think that the 'semiconductor market is over.'

However, in a market where expectations have built up significantly, a slight sense of unease can lead to a massive sell-off.

I felt that I wanted to be conscious of that speed once again.

The stronger the theme, the easier it is to become optimistic.
It is also easy to find reasons why it is rising.
You want to believe it will continue.
You also start to feel like you will be left behind if you don't own it.

However, the market sometimes reevaluates those expectations quite harshly.

That is precisely why, when you see a sharp drop, you should not jump to conclusions.

What has changed?
What has not yet changed?
How close is this to my own assets?

I want to look at things in this order, staying a bit calm.

Next week looks like it will be a week where I am concerned not only with the movements of the SOX index and NASDAQ 100, but also with interest rates, exchange rates, and the ripple effects on Japanese semiconductor-related stocks.

I want to observe the market while confirming the distance to my own assets, without letting my feelings be carried away too much by the magnitude of the news.

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