Key Takeaways:
A blistering rally in semiconductor stocks has pushed a key industry ETF up nearly 50 percent in just 18 trading sessions, a historic winning streak that is now stretching valuations to levels not seen in over a decade and raising questions about the rally's sustainability.
"A big risk now is that expectations become too lofty for companies to exceed,” Steve Sosnick, chief strategist at Interactive Brokers, said.
The iShares Semiconductor ETF (SOXX) now trades at nearly 25 times forward earnings, a 17 percent premium to the S&P 500 and significantly above its 10-year average P/E of 19. The Philadelphia Semiconductor Index, which the SOXX tracks, is on an 18-day winning streak, a run that has only been surpassed once, coming out of the dot-com crash in 2002, according to Bespoke Investment Group.
The rally, fueled by the artificial intelligence boom, has left investors weighing the sector's massive growth potential against the cyclical nature of the industry and increasingly high valuations. While some analysts see pockets of value, others, like Michael Burry, are betting on a correction, holding puts on the semiconductor ETF.
The semiconductor sector has been one of the hottest corners of the market, with the iShares Semiconductor ETF (SOXX) delivering a staggering 1,400% total return over the past 10 years. This performance eclipses broader market and even other growth-focused funds. For comparison, the Vanguard S&P 500 ETF (VOO) returned about 300% and the Schwab U.S. Large-Cap Growth ETF (SCHG) returned 423% over the same period.
The AI-driven demand for high-performance chips from companies like Nvidia, the top holding in both the SOXX and the newer Invesco PHLX Semiconductor ETF (SOXQ), has been a primary driver. The SOXQ, launched in 2021, has already amassed over $1.4 billion in assets and has surged about 150% in the past year.
The historic run has pushed valuations into uncomfortable territory. The SOXX's forward P/E of 25 is a significant premium to its historical average. This has led some to believe a pullback is imminent. "People should not forget this is a cyclical business," Mike O'Rourke, chief market strategist at JonesTrading, said. "The fact that this cycle is the largest ever is an obvious benefit during the upswing, but it also brings risks when the cycle peaks."
This sentiment is echoed by the options market, where famed investor Michael Burry has taken a bearish position on the semiconductor sector. While individual stocks like Nvidia, AMD, and Intel have seen their P/E ratios soar to 42, 74, and 103 respectively, some analysts point to relative value in memory chip makers like Micron, which trades at a much lower 6 times forward earnings.
This article is for informational purposes only and does not constitute investment advice.
