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Concerns about a peak-out in AI growth stocks refuse to fade. Companies are posting results that exceed market expectations, yet share prices have largely moved in the opposite direction.

Market expectations have already risen so sharply that a simple earnings surprise is no longer enough to drive further gains. Analysts say growth stocks need more time to reclaim leadership, and advise holding value stocks and defensive names alongside them for now.

In a report titled "Delayed Rotation into Growth Stocks," Kiwoom Securities found that more than 80 percent of companies that reported during the recent US second-quarter earnings season beat consensus estimates.

The problem is that solid results are not translating into share price gains. Earnings forecasts had been revised steadily upward ahead of the season, and investor skepticism has grown over whether the massive capital expenditure being poured into AI can actually generate returns.

"Market attention is shifting rapidly from the sheer scale of investment to the timeline for payback and the visibility of monetization," said Choi Jae-won, a researcher at Kiwoom Securities.

The phenomenon is particularly pronounced in semiconductor stocks, which had led the broader market rally. Among US IT companies, the software and services sector and the IT hardware and equipment sector both showed a positive correlation between the size of an earnings-per-share surprise and the share price reaction on the day results were announced. The correlation coefficient for IT hardware and equipment exceeded 0.9.

Semiconductors and semiconductor equipment, by contrast, posted the highest average EPS surprise of the three groups at about 16 percent, yet recorded a negative average share price reaction on results day. AMD, Western Digital and SanDisk all reported results that beat expectations, only to see investors take profits — a pattern consistent with the broader trend.

"For the semiconductor sector to see further earnings momentum and a share price re-rating, investors will need confidence that hyperscaler capital expenditure will translate into real revenue, allowing the current wariness to ease," Choi said.

The character of global equity markets has also shifted in the second half of the year. In the first half, South Korea and Japan — with their heavy exposure to AI value chains through semiconductors and memory chips — outperformed, while China and the United Kingdom lagged. That dynamic reversed in July.

As concerns about AI valuations and a shifting competitive landscape in memory chips came to the fore, profit-taking emerged in markets that had risen the most in the first half, and capital rotated into relatively undervalued markets and value stocks. In China, expectations of economic stimulus and valuation appeal drove a rebound led by consumer discretionary and materials stocks. The UK, with its index weighted toward energy and banking rather than technology, demonstrated defensive resilience.

A similar rotation played out in the United States and Europe. Financial, energy and industrial stocks filled the gap left by a shrinking IT contribution to index gains. Notably, equal-weighted indexes outperformed market-capitalization-weighted ones, signaling that the rally was broadening beyond a handful of large-cap technology names.

Growth-style stocks have shown some signs of building a higher floor since August began, but Choi cautioned against reading this as a sustained comeback. "The direction suggests a possible shift back toward growth, but it still seems too early to call it a definitive bull trend," he said.

The prevailing market view is that rather than making an aggressive bet on growth stocks, investors should adopt a "barbell strategy" — holding value and defensive stocks alongside growth names. With peak-out concerns over AI investment not yet fully resolved, uncertainty remains too high to expect a sharp rotation back into growth.

"Even as major IT companies continue to post solid earnings surprises, the market remains on guard about the sustainability of future growth," Choi said. "At the heart of that wariness is uncertainty over whether the capital expenditure of large hyperscalers will translate into real profits."

"Until those concerns visibly ease, this is a period where investors need to maintain a barbell strategy — combining growth stocks that offer valuation appeal despite strong fundamentals with value stocks capable of defending against volatility through improving earnings," he added.


th5@heraldcorp.com