Chip stocks near bull market as AI backlogs fuel 19% rally

Chip stocks are within 1.1 percent of a bull market, but analysts warn that record AI backlogs may not all convert to revenue.

The PHLX Semiconductor Index climbed to 12,399.38 on Wednesday, within 1.1 percent of the 12,536.99 threshold that would confirm a new bull market, defined as a 20 percent gain off a recent low.

"The caution is the scale of the commitments funding that demand," said Dan Kemp, founder of investment consultancy Portfolio Thinking.

Sandisk and Micron Technology each gained about 6 percent and 5 percent, while SK Hynix's American depositary receipts rose 9 percent. Nvidia and Advanced Micro Devices added 3 percent and 2 percent. CoreWeave, Super Micro Computer and Lumentum Holdings, which reported earnings Tuesday, jumped 19 percent, 19 percent and 13 percent, respectively.

The rally rests on AI infrastructure spending that Morgan Stanley analyst Erik Woodring expects to reach $1.4 trillion in 2027, above the market's $1.2 trillion forecast. Whether those orders convert to revenue will determine whether the sector holds its gains.

Backlogs Face a Reality Check

The earnings reports from CoreWeave, Super Micro and Lumentum — companies further down the AI chain that connect and install chips — gave investors a real view of chip demand, Kemp said. But he pointed to CoreWeave, which raised its capital-spending plan to between $35 billion and $39 billion from $31 billion to $35 billion while its revenue outlook came in "far more modestly." The neocloud provider reported a net interest expense of $640 million for the quarter against adjusted operating income of $128 million.

"We have yet to see the consumer and corporate spending that would justify commitments on that scale," Kemp said.

Both CoreWeave and Super Micro touted growing backlogs, with the latter reiterating that new orders reached more than $60 billion in the June quarter. Kemp said he remains skeptical of those figures given the possibility that some orders could eventually be canceled or delayed. "Investors are entitled to read a large backlog as a positive signal, but they should price it as a range of outcomes rather than as revenue that has already happened," he said.

Wednesday's chip rally also coincided with a consumer-price index report that came in broadly in line with Wall Street's forecast, giving investors little reason to expect a shift in Federal Reserve policy.

Brian Mulberry, chief market strategist at Zacks Investment Management, said the earnings reports "help confirm that the AI trade is getting wider, not just bigger." As CoreWeave confirmed demand for graphics processing units remains strong, Lumentum showed how that drives a need for infrastructure to power and run those chips. Not all chip companies will benefit equally, he said, so "fundamentals will ultimately matter more." Investors are now looking for accelerating growth, "not just pure price momentum." In his view, Nvidia, Broadcom and optical networking provider Coherent have the strongest fundamentals.

Kemp shared a similar view, saying the question for long-term investors is whether demand is growing faster than a stock's price implies. "On that, the evidence is far less comfortable," he said.

For investors, the stakes are high. Woodring pointed to commentary from Amazon, Microsoft, Alphabet and Meta Platforms, all of which cited industry capacity constraints and said demand continues to outstrip capacity. Nvidia trades at about 17 times forward earnings, while Micron trades below 6 times, leaving little room for error if AI orders slow. The sector's next test comes as hyperscalers finalize 2027 capital budgets, which will show whether the backlog converts into revenue.

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