Chip Stocks Add $3.8 Trillion in 6 Weeks on Broadening AI Demand

The semiconductor industry is experiencing a historic surge, with the S&P 500 semiconductor index gaining approximately $3.8 trillion in market capitalization in just six weeks, fueled by insatiable AI-driven demand that has now broadened from GPUs to memory and CPU chips.

"Now is the time when the world's wealthiest tech companies are frantically buying up all the chips and computing power they can get their hands on," said Jonathan Cofsky, a portfolio manager at the $8 billion Janus Henderson technology and innovation fund. "This directly translates into substantial profits for the manufacturers."

The rally has delivered stunning returns, with the iShares Semiconductor ETF (SOXX) up 54.7 percent year-to-date, according to data from Zacks Investment Research. The demand pushed the PHLX Semiconductor Index to its strongest six-week gain since the peak of the dot-com bubble on March 10, 2000. This boom is reflected in strong earnings, with Taiwan Semiconductor Manufacturing Co. (TSMC) reporting a 40 percent year-over-year revenue increase in its first quarter and Broadcom's AI-related revenue jumping 106 percent.

The core question for investors is whether this rally is sustainable or a repeat of the 2000 bubble. While soaring profits provide fundamental support, record trading in leveraged ETFs and cautionary outflows from funds like the VanEck Semiconductor ETF (SMH) suggest growing concern about a market that may be overheating.

Earnings Boom Provides Valuation Cushion

Unlike the dot-com era, the current semiconductor rally is built on a foundation of extraordinary corporate profits. Memory-chip maker Micron Technology, for example, is projected by analysts to see its revenue climb to $107 billion this fiscal year with an operating profit of $77 billion, a dramatic reversal from its $15.5 billion revenue and operating loss in 2023 when memory prices were low.

Despite its stock price soaring approximately 770 percent over the past year, Micron's forward price-to-earnings ratio stands at just 8.9 times, according to FactSet data. This appears inexpensive compared to the S&P 500's average of 23 times. "The current anomaly is precisely how strong the earnings growth is," said Denise Chisholm, director of quantitative market strategy at Fidelity Investments. This strong profitability distinguishes the current market from the dot-com bubble, where many of the fastest-rising companies had little to no earnings.

Retail Frenzy Signals Peak Speculation

The market's vertical ascent has attracted a wave of retail investors, many of whom are using aggressive financial instruments. The Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL), which uses derivatives to seek three times the daily return of a semiconductor index, has gained about 1,200 percent over the past year.

Combined daily trading volume for SOXL and its bearish counterpart, SOXS, surged to approximately 330 million shares by the end of April, the highest level in at least 16 months. "AI is, to a very large degree, driving the market and even the entire economy," Steve Sosnick, chief strategist at Interactive Brokers, said. "Semiconductors are the most direct expression of this logic... This is the closest to a vertical move I can remember."

Still, signs of caution are emerging from more experienced market participants. The VanEck Semiconductor ETF (SMH) recorded its largest-ever weekly outflow of $2.3 billion in early May. Peter Feinberg, a veteran investor who has held positions in Broadcom and TSMC for over a decade, acknowledged the recent gains felt "somewhat surreal." He captured the mood of many long-term investors, stating, "The most fun part of the party is often the last half hour before the police show up to shut it down."

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