To cut or not to cut AI spending?

TSMC announced a record profit in Q2 and 77% profit growth compared with the same period last year. A 77% profit increase. The result was well above expectations, beating the already lofty consensus by nearly 12%. Yet the stock fell 5% after the earnings release.

Earlier this month, Samsung fell nearly 10% after announcing a 1’900% profit surge in Q2. That result also came in meaningfully above analyst expectations.

The inability of such impressive results to trigger a positive market reaction shows one thing: valuations across chipmakers have run ahead of themselves. These companies are not only priced to perfection, they are also increasingly priced in disconnect with the shifting AI outlook: people are growing uncomfortable with the massive AI buildout, pointing to overcapacity risks - among them is Federal Reserve (Fed) Chair Kevin Warsh, while investors growing uncomfortable with the industry's enormous AI spending, pointing to rising leverage risks.