Bitcoin catches a bid after weekly loss, on track for best day in over a month
Since the start of the year, the iShares Semiconductor ETF (NASDAQ:SOXX) is up 33% compared with the broader market, which is up only 4%. The primary rationale for the significant outperformance appears to be the insatiable demand for AI and a shift in its usage.
Unlike the past couple of years, in which Nvidia and its GPU production for the development of large language models (LLMs) led the AI chip market, CPU usage is gaining ground as AI agentic models become more popular. Accordingly, CPU producers like Intel (NASDAQ:INTC) and AMD are now playing catch-up to Nvidia (NASDAQ:NVDA), the primary GPU producer. The graphic below shows that agentic AI is equally reliant on CPU and GPU chips, unlike the GPU-centric development of LLMs.
While Nvidia may lose some market share as CPU usage grows relative to GPU usage, there is another facet to consider that favors Nvidia. Profit margins on GPUs are almost double that of CPUs. For example, Nvidia has a profit margin of about 75%, while Intel and AMD are in the low- to mid-40 % range. There are two primary reasons for the distinct advantage as follows:
- Inelastic AI demand — Hyperscalers like Microsoft, Google, Meta, and Amazon are willing to pay premium prices for GPU chips because the alternative (delayed AI deployment) is costlier.
- Monopoly pricing — NVIDIA controls ~80–90% of AI GPU supply, giving it enormous pricing power.
CPUs are much more of a commodity than GPUs. As such, they face much more intense competition, which compresses margins. There are also ARM-based alternatives that offer further competition. So while CPU usage will increase relative to GPUs, profit margins will likely further compress for CPU makers, while remaining abnormally high for Nvidia.
Technology Leads As Breadth Deteriorates
A 13% rally in 13 days is quite the feat. Within the sharp rally, there is also a sharp divergence in returns. Hands down, technology led the market higher, while many other sectors relatively languished. As we show below, over the last three weeks, technology stocks (XLK) have moved from the bottom left, indicating oversold conditions on both an absolute and a relative basis, to overbought on both. At the same time, two of the more recently favored sectors, staples (XLP) and utilities (XLU), have moved lower. Their absolute scores haven’t changed much, but their relative scores have fallen quite a bit.
The market was in a topping pattern of sorts from November until a few weeks ago. During that period, lower-beta sectors led the way, while technology and communications faltered. The recent rally, as we noted, is being led by the sectors that powered the market before November. This again raises the question of whether the recent outperformance of technology and other large-cap growth stocks signals that the upward trend is back on track, or a brief respite before value and low beta take over and prices consolidate or even decline.
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