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CHIPS CRUMBLE AHEAD OF NVIDIA'S WEDNESDAY REPORT

Chip stocks are selling off, and depending on how you look at it, the drop might be a much-needed pause following recent record highs, and potentially a chance to buy into the group ahead of AI heavyweight Nvidia's NVDA.O quarterly report this week.

The PHLX .SOX is down 2.6% in Monday's session, bringing its loss in the past two sessions to over 6%. But the index remains up almost 60% this quarter as investors pour money into AI-related stocks amid a massive data center buildout and shortages of memory chips, graphics processors and other key components.

With AI stocks fueling much of Wall Street's gains this year, Nvidia's fiscal first-quarter report late on Wednesday will easily be Wall Street's most scrutinized event of the week. The Silicon Valley company's shares hit record highs last week, and its stock market valuation is nearing $6 trillion.

Nvidia's stock is down almost 1.4% in Monday's session. It is trading at about 24 times expected earnings, only slightly more expensive than the S&P 500's forward PE of 22, according to LSEG data.

The chipmaker's relatively modest PE reflects analyst earnings estimates that have mostly kept up with its stock gains.

But other chipmakers and AI-related stocks appear much more expensive and potentially at risk of a selloff, especially if worries about inflation force the Federal Reserve to raise interest rates rather than cut borrowing costs. Intel INTC.O is at 86 times expected earnings following its recent stock rally, while Advanced Micro Devices AMD.O is trading near 44 times earnings.

"The vertical move upward in tech is not sustainable and while earnings have been very impressive, that strength is already priced in," Questar Capital Partners Chief Investment Officer Richard Reyle warned in a commentary email on Monday.

(Noel Randewich)

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