Semiconductor stocks continued to decline in Friday’s opening trade as investors continued to rotate out of AI names despite another round of solid corporate earnings.

During an interview with CNBC, JPMorgan’s Global Market Strategist, Hugh Gimber, explained that investors are concerned that the sector's next leg higher will depend on whether Big Tech companies continue to ramp up their AI spending.

Shares of Nvidia Corp. (NVDA), Intel Corp. (INTC), Advanced Micro Devices Inc. (AMD), Qualcomm Inc. (QCOM), Marvell Technology Inc. (MRVL), SanDisk Corp. (SNDK), and other semiconductor companies were down between 3% and 7% during Friday’s opening trade.

The Direxion Daily Semiconductor Bull 3X Shares (SOXL) ETF was down about 16% at the time of writing, while the iShares Semiconductor ETF (SOXX) fell nearly 5%.

AI Rally Now Hinges On Hyperscaler Capex, Gimber Says

Gimber added that the recent sell-off in chip stocks is not a reflection of weakening fundamentals, noting that semiconductor companies continue to deliver strong results.

"Earnings power of semiconductor names remains absolutely rock solid. We've had a number of reports out over the past week or two from some of the biggest players in the space and they're delivering good earnings," he said.

Instead, Gimber said investors are increasingly questioning whether the industry's rapid earnings growth can continue beyond the current cycle.

"The question here is not about their earnings potential now, it's really about the sustainability of that earnings growth. Investors are growing increasingly concerned about whether the earnings can be even better in 2027, or 2028, or 2029," he added.

According to Gimber, the answer will largely depend on the world's biggest cloud providers, whose massive AI infrastructure spending has been the primary driver of demand for advanced semiconductors.

"For me, I think what's key here is not so much what the semis names are telling you themselves, but rather what we're going to get from the hyperscalers over the next couple of weeks, because all of that earnings growth is because of hyperscaler capex," he said.

What Could Turn The Tide For Chip Stocks?

Gimber said investors are unlikely to regain confidence in semiconductor stocks until the largest cloud providers reaffirm their commitment to AI infrastructure spending during the upcoming earnings season.

"So to see a floor going to semiconductors, to see the valuations on offer today start to present good value, I think you need to hear more from the hyperscaler names over the next couple of weeks, really reaffirming to investors that yes, capex estimates have already risen by a huge amount over the past six to 12 months, but then there is more room for them to increase again," he said.

According to Gimber, renewed confidence in higher AI infrastructure spending would help reinforce the long-term investment case for semiconductor companies, even as investors grapple with lofty expectations for future growth.

He added that the increase in capex outlay from hyperscalers to about $700 billion this year explains why Wall Street is anticipating semiconductor companies to report 100% earnings growth.

"That's where you start to build conviction again in these longer-term earnings story for the semis," he added.

Gimber also noted that it is unsustainable for only one group in the tech sector to keep pulling up the rest of the pack, adding that different companies in the space need each other to grow.

“Ultimately for tech overall, you need sectors outside of tech demonstrating that demand for this technology is sufficient to allow all parts of the tech sector to keep up a decent margin,” he added.

Alphabet Inc. (GOOG, GOOGL), Intel Corp. (INTC), Microsoft Corp. (MSFT), Meta Platforms Inc. (META), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and other tech giants are scheduled to report their latest quarterly results over the next two weeks.

The tech-heavy Nasdaq Composite index was down nearly 2% at the time of writing.

The Invesco QQQ Trust (QQQ) is up 27% over the past 12 months, while the iShares U.S. Technology ETF (IYW) is up 37%.