Given its historic reputation as an indicator of general risk appetite, investors may be wondering why the Philadelphia Semiconductor index, or the SOX as it is known, is falling while the broader US stock market is rising on hopes of a ‘soft landing’ for the economy.

The reason for the weakness is the current chaos in the $160 billion memory-chip industry, which is struggling with an inventory glut at the same time as demand for some cheaper-end memory products is falling.

The chip sector is notorious for swinging from boom to bust almost at the drop of a hat as the economic cycle changes, product cycles shift and manufacturers over-invest in new capacity.

Total worldwide semiconductor sales hit nearly $530 billion in 2021 as customers rushed to stock up after supplies dropped in response to Covid, but the shortfall in chips has been reduced at the same time as supply chain bottlenecks have eased.

The result is customers are cutting future orders as they already have enough stock to work with, sending chip prices tumbling.

Also, sales of some high-volume products which use lots of chips are slowing.

Take smartphones, where South Korean firms such as Samsung Electronics (005935:KRX) and LG Electronics (066570:KRX) are major players.

Both firms delivered disastrous quarterly numbers last month and warned of falling demand for phones, televisions and home appliances.

Consumer and investor favourite Apple (AAPL:NASDAQ) is due to report as Shares goes to press, but an educated guess would suggest iPhone sales won’t be immune from a broader slowdown.

Sales of personal computers and tablets are also falling, with volume shipments this year expected to be around 270 million against 286 million last year and 340 million in 2021 according to Gartner.

In retrospect, it is clear higher spending during the pandemic, fueled by working from home and stimulus (or furlough) payments, simply brought sales of these items forward and now the consumer electronics industry is facing a cliff-edge in demand.

In December 2022, chipmaker Micron (MU:NASDAQ) reported a 38% drop in its previous quarter’s revenues, together with a collapse in its gross margin, and warned the industry’s profitability would be ‘challenged throughout 2023’.

On 26 January its rival Intel (INTC:NASDAQ) reported a 32% drop in fourth-quarter sales and predicted an even bigger fall of 40% for the first quarter of 2023 due to weaker end-markets and falling prices.

As more companies report bad news, there is a risk negative sentiment starts to spread outside of semiconductors to other highly operationally-geared and capital-intensive areas of the technology sector leading to some of the biggest names being pulled down in sympathy.

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