By Lewis Krauskopf
NEW YORK, May 13 (Reuters) – A stunning run-up in shares of semiconductor companies has helped drive the U.S. stock rally, but the eye-popping gains are sparking concerns about an overheated market and prompting some investors to prepare for a pullback.
The latest wave of artificial-intelligence market enthusiasm is buoying semiconductors broadly, after bellwether Nvidia symbolized the AI trade over most of the bull stock market that began in late 2022. That fervor spread throughout the industry this year, as massive capital spending on data centers and other AI-related infrastructure boosted chip demand, although the growing presence of semis in equity indexes means any hiccup for the group could have wider fallout.
“It’s sort of a perfect mix – there is enough of a fundamental story, and then the technical story is also quite strong,” said Steve Edwards, senior investment strategist at Morgan Stanley Wealth Management. “Those two things are coming together into a confluence that has created a very enthusiastic and optimistic investor base, and that is driving that momentum.”
Since the end of March, the Philadelphia SE Semiconductor index has soared 64%, compared to a nearly 17% gain for the S&P 500 U.S. equity benchmark. Shares of Micron Technology and Advanced Micro Devices more than doubled during that time, while Intel has nearly tripled.
However, even investors who are upbeat on the area are bracing for the hot trade to cool. The action in semis has drawn some comparisons to the 1999-2000 Internet bubble.
“Anytime you see parabolic moves in anything, you have to ask yourself, are things getting too ebullient here?” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. The firm on Monday sold a position in Qualcomm shares from income-generating portfolios, but other portfolios still hold stocks including AMD and Nvidia, Tuz said.
The shares pulled back on Tuesday, with the SOX index ending down 3%. Some investors were growing bearish on the group. High-profile investor Michael Burry said on Tuesday he was still holding puts, which offer the right to sell an asset, in the iShares Semiconductor ETF.
SEMIS’ GAINS DRIVE MARKET HIGHER
The semis’ outperformance means the broader market is increasingly reliant on the high-flying group. The 19 semiconductor and semi equipment stocks in the S&P 500 comprised 18% of the index’s weighting as of Monday.
The AI buildout has also propelled tech companies specializing in memory and storage, such as Sandisk and Western Digital. Gains in semis and memory stocks accounted for 70% of the $5.1 trillion in market capitalization added by the S&P 500 in 2026 as of Monday, according to Michael O’Rourke, chief market strategist at JonesTrading.
Meanwhile, market watchers point to signs of weakness below the market’s surface. Although the S&P 500 was at an all-time high heading into the week, barely over half of the stocks in the index were above their 50-day moving averages, according to Bespoke Investment Group.
The semis group has “such a large weight in the S&P 500 now that any correction or any disappointment creates risk for the broader market,” O’Rourke said.
PROFIT, REVENUE BOOST EXPECTED THIS YEAR
Semiconductors are critical components to a host of electronics and Wall Street has often viewed the industry’s stock performance as an indicator of the health of the economy and the direction of the broader market.
More recently, they have been at the center of the AI boom.
“It’s really the AI infrastructure buildout. It’s the computing needs, it’s the networking needs,” said King Lip, chief strategist at BakerAvenue Wealth Management in San Francisco, which has overweighted semi stocks in its portfolios. “It’s really a multi-year capex cycle — very exciting in our view as it relates to semiconductors.”
Worldwide semiconductor revenue is expected to rise 64% to $1.3 trillion this year, according to research firm Gartner. Semiconductors and semi equipment companies in the S&P 500 are expected to increase earnings by about 95% this year, compared to an expected 62% increase as of January 1, according to Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.
“When you think about the fundamentals that are driving many of these companies, I think that there is still room to run,” said Ayako Yoshioka, senior investment strategist at Wealth Enhancement, whose firm’s holdings include AMD and Micron, although she said the group could be due for a pause.
SIGNS OF AN OVERSTRETCHED MOVE?
There are signs the semis trade is getting stretched. One technical gauge, the relative strength index, on Friday hit 85.5 on a weekly basis for the widely followed Philadelphia SOX semis index, or its most “overbought” reading since the tech-bubble peak in March 2000.
“When something is overbought, it can stay overbought for some time,” Edwards said. However, he added, “technicals have a way of reversing themselves, and unfortunately, that can be a whipsaw.”
Any weakness in the AI theme could reverberate to semis.
Jack Ablin, chief investment officer at Cresset Capital, said the firm has favored semiconductor shares in some of its tactical portfolios, but he is watching for signs of struggle with the stocks.
“We will hold them even if they get expensive,” he said, “as long as they have positive momentum.”
(Reporting by Lewis Krauskopf; editing by Megan Davies and Rod Nickel)
