By Martin Baccardax

Stock markets have been firmly set in a "beat and raise" focus heading into the start of a crucial earnings season, and their reaction Tuesday to a manifestly impressive set of figures from the world's biggest chip maker suggests anything less than perfection likely will disappoint.

Samsung's impressive second-quarter earnings, which included a near 20-fold increase in profit and a doubling in overall revenue, failed to add any extra juice to a market already foaming with speculative fever for all things tech following a red hot first half of the year.

The question for investors, heading into both the second-quarter earnings season and the traditional lull of the summer months, is whether the market's initial reaction to the stellar, but not door-busting, numbers from the chip maker are a sign of tech stock fatigue or a coded bubble warning for the world's hottest trade.

Charu Chanana, chief investment strategist at Saxo Bank, said Samsung's earnings could have been a "victory lap" for the AI trade that have powered markets higher this year, but instead was shaping up to be a "big shift" in the memory chip boom that has led it.

"Strong earnings are no longer enough," she said. "For AI-linked stocks, the market now wants strong earnings, strong guidance and clear evidence that pricing power can last."

"The debate is no longer whether the current cycle is strong: It clearly is," she added. "The debate is whether the cycle is approaching its most dangerous stage: the point where today's shortage becomes tomorrow's overcapacity risk."

We're not there yet, of course, but the market reaction to Samsung's preliminary earnings, which included profit of more than $58 billion and revenue of $112 billion, was nonetheless telling.

South Korea's KOSPI index fell nearly 7%, with circuit breakers supporting both Samsung and its main index rival, SK Hynix, from declining even further.

Japan's Nikkei 225 slumped more than 2%, and futures tied to the Nasdaq Composite suggested a reversal of reasonably solid gains from Monday.

Another question for investors is whether that reaction likely will repeat when the biggest U.S. tech companies, including the cohort of hyperscalers found within the Magnificent Seven and the chip and foundry stocks that have soundly outpaced them, start reporting earnings later this month.

Goldman Sachs' chief U.S. equity strategist Ben Snider suggests only two stocks — Nvidia and Micron Technology — will comprise about 40% of the S&P 500's projected earnings growth, with the broader AI infrastructure complex contributing nearly two-thirds of the 22% advance he projects for the benchmark's overall earnings tally.

That figure, the highest entry point in five years, follows a 27% gain over the first quarter that topped early Wall Street forecasts by as much as 15 percentage points.

"The big risk up ahead is that technology companies, especially the hyperscalers, won't beat analysts' overly optimistic earnings growth estimates for the quarter," said Ed Yardeni, founder and president of Yardeni Research.

"That could cause a correction among technology stocks," he added, noting that the "overall stock market might dodge a correction if investors rotate into sectors that have lagged and report better-than-expected earnings."

That rotation continues apace.

Healthcare, financial, and industrial stocks have led the market's gains, in terms of sector performance, for much of the past month, following the S&P 500's peak in early June. Tech-heavy sectors, meanwhile, have traded mostly in the red.

The Dow Jones Industrial Average, which topped 53,000 for the first time Monday, has outpaced both the S&P 500 and the Nasdaq over the past month, rising nearly 4.5%. Bond markets suggest broader concerns as well.

The PHLX semiconductor index, meanwhile, is now more than 10% south of its all-time peak from June 22, with more declines to come as Micron, Intel, Marvell Technology and Advanced Micro Devices move firmly lower in premarket trading.

"The market now wants to know whether this is simply a correction within a strong trend or the start of something more persistent," said Zaheer Anwari, co-founder and CEO at the Revacy Fund.

"For now, this still looks more like consolidation within that structure than the start of a reversal," he added. "What matters now is whether this remains a short-term pause or develops into a broader correction. So far, it still looks like the former."

Write to Martin Baccardax at martin.baccardax@barrons.com

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