Broadcom Sparks AI Stock Sell-Off Despite Strong Jobs Data

Broadcom shares came under pressure after its earnings report failed to lift 2027 AI revenue guidance, helping spark a broader sell-off in AI and semiconductor stocks. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Despite a much better-than-expected monthly jobs report and the S&P 500 hitting new highs earlier in the week, stocks sold off sharply last week. The pain was primarily in technology and artificial intelligence (AI) related stocks.

Market Reaction

As would be expected in a tech-focused sell-off, the Magnificent 7 underperformed last week. The relatively small 0.5% decline in the average stock price shows that the stock swoon was not very broad, but centered on tech and AI-related companies.

The proximate cause of the sharp decline in tech and AI stocks was Broadcom’s (AVGO) quarterly earnings report on Wednesday. While sales and earnings for the quarter were above expectations, 2027 AI revenue guidance was left unchanged. With the stellar growth of agentic AI, expectations were for a robust increase in management guidance. This shortfall raised concerns about the AI spending cycle in general and Broadcom’s competitive position.

The profit-taking in the tech and AI-related sectors should be kept in proper perspective; the iShares Future AI and Tech ETF (ARTY) remains almost 47% higher year-to-date after declining 12.5% off its peak. Further, the semiconductor sector, which is Broadcom’s home, has been rising at a torrid pace. Even after last week’s decline, the sector is still up over 33% year-to-date, while Broadcom remains 11.5% higher. Another example is Micron Technology (MU), which is still up over 200% year-to-date, despite falling 11% last week.

Earnings

According to FactSet data, the technology sector should continue to post robust earnings growth. The second-quarter technology earnings growth is estimated at 58.1% year over year, while full-year earnings growth is forecast at 44.1% year over year.

While stock prices may not follow earnings over the short term, earnings growth is the fuel for rising prices over the long run.

Economy

The less economically exposed defensives outperformed the more economically sensitive cyclical stocks last week, but this doesn’t suggest rising odds of an economic downturn. The cyclical stocks were at an extreme level of outperformance prior to last week, so this appears to be more of a profit-taking and rotation move.

Further, the betting odds of a US recession fell last week to below one-in-five.

Jobs

The most critical economic issue is typically the labor market because US consumers have generally continued to spend and propel the economy when their salaries allow. Nonfarm payrolls grew by 172k, which was a positive and above expectations of 88k. Importantly, prior months were revised higher, typically a sign of a firming outlook.

The unemployment rate held steady at 4.3% in May, down from 4.4% in February.

Monitoring the employment-to-population ratio among prime-age individuals, aged 25 to 54, should signal when concern about the unemployment rate is warranted. The three-month average of the prime-age employment-to-population ratio has been holding steady, keeping the labor market resilient. The three-month average has remained steady, but the May monthly reading improved.

One weekly data point is continuing claims for unemployment benefits, which have fallen, reflecting less difficulty the unemployed face in finding a new job. This further evidence supports an improving job outlook.

Alternative Jobs Data

While the non-governmental economic datasets don’t have as extensive a history, they can provide further color, since government statistics are subject to data-collection challenges and thus to massive revisions.

While the government reports US job openings monthly, LinkUp provides a weekly measure for the top 10,000 global employers. This measure has not yet shown improvement in the labor market, but this may be because job growth is just beginning to broaden across categories.

What To Watch This Week

Wednesday’s May consumer inflation (CPI). The monthly reading will likely be hot due to higher energy costs associated with the Iran conflict. The year-over-year inflation reading should rise to 4.2% from April’s 3.8%. If the Iran conflict is nearing its end, as oil prices seem to indicate, this could be the peak pace of inflation for this cycle.

The producer price index (PPI) inflation reading is due on Thursday, with the headline May PPI year-over-year reading expected to be 6.4%.

Oracle (ORCL) reports earnings on Wednesday after the close and will provide an important data point for artificial intelligence demand and capex plans.

Conclusions

The monthly jobs report was better than expected, with the details suggesting the labor market has begun to improve. Fundamentals remain consistent with the base case of no recession, so broad-based economic worries are unlikely to be the culprit behind the stock declines.

The sharp sell-off in the technology sector seems to be driven by sky-high expectations and by prices in some sub-sectors becoming extended, rather than by fundamental earnings weakness or the end of the AI spending wave. Oracle’s earnings and guidance this week should provide additional color on the strength of AI-related spending and earnings.

Disclosure: Glenview Trust may hold the stocks mentioned in this article within its recommended investment strategies.