AI chip stocks test 200-day support ahead of Fed rate call

Semiconductor and AI stocks are testing key technical support levels as the Federal Reserve prepares to deliver its interest rate decision at 2 p.m. ET, with traders split on whether policymakers will hold or hike rates for the first time since Chair Kevin Warsh took office.

"Options pricing implies a 0.8% move in either direction, and a hawkish hold — our 50% probability base case — would likely push the S&P 500 down as much as 0.5%," JPMorgan Chase & Co. strategists said in a note. A quarter-point hike, assigned a 20% probability, could trigger a 2% decline, they said.

The Federal Open Market Committee's target range stands at 3.5% to 3.75%, with CME FedWatch data showing about 69% of traders expect no change and 31% anticipate a quarter-point increase. The decision comes as U.S. consumer price inflation accelerated from 2.4% in February to 4.2% in May, driven partly by elevated gas prices tied to the Iran conflict, before easing to 3.5% in June. Consumer confidence slipped to 90.8 in July from a revised 92.2 in June, the Conference Board reported this week.

The semiconductor sector faces asymmetric risk from the outcome. A hawkish surprise could accelerate recent selloffs in chip stocks, which have already dragged the Nasdaq lower this week, while a dovish hold that points to rate cuts later this year could reignite demand for AI infrastructure names. The European Central Bank's rate cut last month — its first in five years — lifted the Stoxx 600 to a record high and boosted Europe-focused semiconductor ETFs, showing how rate-sensitive the sector has become.

Chip Stocks Face Dual Pressure From Rates and Valuations

Nvidia Corp., Advanced Micro Devices Inc., and other AI chipmakers have seen their shares slide in recent sessions as the market repriced the probability of a Fed hike. The PHLX Semiconductor Index, a benchmark tracking 30 chip companies, has fallen from its July highs as investors weigh whether AI-driven demand can justify current valuations if borrowing costs remain elevated.

ASML Holding NV, the Dutch lithography equipment maker whose tools are essential for producing advanced chips, saw its U.S.-listed shares gain 1% on the ECB rate cut but remain vulnerable to the Fed's decision. TSMC, the world's largest contract chipmaker, has similarly been caught in the crosscurrents between AI optimism and macro uncertainty. Intel Corp., which is racing to regain process leadership with its 18A node, faces additional pressure from higher rates that raise the cost of its manufacturing buildout.

The sector's valuation compression reflects a broader recalibration. The iShares PHLX Semiconductor Sector Index ETF (SOXX) has declined about 8% from its 2026 peak, with the group's forward price-to-earnings multiple contracting as the Fed kept rates restrictive. A rate cut would provide immediate relief by lowering the discount rate applied to future AI chip revenues, while a hike would reinforce the higher-for-longer narrative that has weighed on growth stocks.

For investors, the Fed's decision will determine whether the sector's technical support levels hold or break. A dovish outcome could trigger a relief rally in names like Nvidia, which trades at about 35 times forward earnings, while a hawkish surprise could push the sector into correction territory. The next major event for chip stocks after the Fed will be Nvidia's quarterly earnings, expected next month.

This article is for informational purposes only and does not constitute investment advice.