Friday's market selloff punished an array of sectors tied to the capital spending boom -- but some are more exposed than others.
Solar stocks fell 9% and electrical equipment and infrastructure names were dragged lower after a strong May jobs report pushed Treasury yields higher and revived fears that interest rates could rise again.
Semiconductor shares plunged 10.3%, marking their largest one-day drop since March 2020. Losses were amplified by Broadcom's earnings results posted Wednesday, which showed a slight revenue miss and weaker-than-expected near-term AI chip forecast.
Higher yields make bonds more competitive and shrink the present value of profits that won't show up for years -- which is exactly the kind of profit growth stocks are priced on.
But capital-intensive industries whose cash flows are current, contracted, or partly protected from higher financing costs held up much better. Utilities and real estate investment trusts rose on Friday about 0.9% and 0.7%, respectively, while home builders, airlines, and conventional infrastructure stocks slipped only modestly.
So what separates the winners from the losers? In part, it comes down to who has to put up capital, how fast they get it back, and whether they can hand the higher cost to someone else.
For example, Big Tech companies can pay for most of their data center buildout straight out of cash flow. Data center developers, power producers, and clean energy companies orbiting them often can't, and must borrow or sell stock to build the products that generate profits.
Sector Risk
The solar sector looks the most exposed. Developers spend most of a project's cost before a single watt of energy gets sold, then recover it through power sales stretched across 20 years or more. Higher interest rates make the debt more expensive and gut the present value of cash that may not arrive until later down the line.
Residential solar has a more acute problem. Solar panel leases and power purchase agreements turn a big upfront cost into a monthly bill. Push financing costs up, and that monthly bill stops looking cheaper than the utility -- which is the sector's whole pitch.
Electricity equipment suppliers sit in a better spot. Their customers finance the projects, and they often collect deposits or milestone payments before anything ships. It's unlikely they would cancel turbines and transformer orders just because of modest rate hikes.
Regulated utilities are also better protected. When regulators approve spending to expand or upgrade the electric system, utilities can generally recover those costs from customers over time and earn a profit on the investment.
The chip selloff looks like it overshot, too. Broadcom missed quarterly revenue by less than $100 million, and its guidance of $16 billion in third quarter AI-chip revenue came in only a touch under consensus.
However, investors were spooked by the forecast, with semiconductor stocks shedding about $1.3 trillion in market value on Friday alone. The Philadelphia Semiconductor Index fell 10.3% that day, but is still up more than 70% on the year, which indicates crowded positioning and profit taking did most of the damage.
What's Ahead
The Federal Reserve's June 16-17 policymaking meeting will be the first led by new Chair Kevin Warsh, and an early test of whether the pressure for lower interest rates that accompanied his appointment can survive stronger economic data.
President Donald Trump has repeatedly called for cheaper borrowing costs, and said during Warsh's confirmation process that he would be disappointed if rates did not fall quickly.
The strong May jobs report increased expectations for at least one rate increase by year-end to roughly 70%, according to market pricing data from the CME FedWatch Tool. The Fed is still widely expected to leave rates unchanged in June.
The next earnings season is still several weeks away, but investors may not have to wait that long for clues about whether Friday's selling was justified. Quanta Services may provide an early signal. The company, which builds infrastructure needed to connect new power plants and data centers to the grid, is scheduled to appear at investor conferences on June 16 and 17, where executives could address the durability of its record backlog and whether customers are delaying projects.
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