After enduring their worst month in more than a decade, semiconductor stocks are snapping back with a ferocity that once again forces a familiar question: is it time to dive in, or step aside?
The PHLX Semiconductor Sector Index (SOX) tumbled more than 20% from its June peak, logging its steepest monthly decline since the 2008 financial crisis in July. Then came earnings from cloud giants Microsoft and Amazon. Both beat expectations, and chip stocks raced higher late last week and into Monday.
Behind the rebound lies a crucial shift in how the market views returns on artificial intelligence spending. Jefferies analysts said in a Monday note that the Microsoft and Amazon results “offer the most significant proof points to date that large-scale bets on AI will generate tangible returns.” They judged that the negative sentiment surrounding AI trades may have reached a bottom. Citi, Bank of America and UBS expressed similar conviction, arguing that big-tech earnings reaffirmed the case for chip stocks.
Yet beneath the bullish chorus, signals of a cyclical peak are stacking up. Valuations are the most immediate concern. Trailing price-to-earnings ratios for the VanEck Semiconductor ETF, iShares Semiconductor ETF and SPDR S&P Semiconductor ETF all sit between 40 and over 60. Even more telling, some leading names are seeing multiples contract while profits still grow. Nvidia’s P/E, for instance, has retreated from over 100 in 2023 to just above 30, hinting that investors are increasingly unwilling to sustain premium pricing — and quietly bracing for a slowdown.
A deeper discomfort stems from a subtle but familiar change in rhythm. Market sentiment is shifting in a manner eerily reminiscent of the tech sector’s deceleration phases in 2013 and 2016. There was no recession then, only a sense that recent innovations lacked fresh catalysts to extend the excitement. Today, big-tech capital expenditure on AI infrastructure continues to climb, yet it remains far from clear that artificial intelligence is delivering sufficient marketable value to justify the outlay. OpenAI’s recent, dramatic price cuts for certain versions of ChatGPT underscore the point.
The IPO market is also flashing caution. Too many technology companies wait too late in a growth cycle to go public, only pulling the trigger once investors have turned from bold to suspicious. Space Exploration Technologies saw its stock roughly halve after an initial pop. The presumed valuation of OpenAI’s anticipated offering, meanwhile, keeps shrinking. Collectively, these hints suggest that AI mania pushed semiconductor shares ahead of themselves, and a correction is now unfolding.
Taken together, the current rally looks less like the start of a new one-way surge and more like a complex mix of sentiment repair and earnings validation. Beneath the index-level gains, dispersion among individual names is widening sharply, making the case for buying the entire sector increasingly shaky. For those determined to participate, picking stocks with care rather than chasing the basket may be the more rational path. A string of earnings in the coming weeks will offer a clearer direction.
