The great chip rush

THE semiconductor sector has become the stock market’s hottest trade, but according to a Bloomberg report, the extraordinary rally in chipmakers is also reigniting a familiar question on Wall Street: Are investors witnessing a genuine technological transformation, or the early stages of another market bubble?

Few sectors have enjoyed a run quite like this, the newswire points out, noting the Philadelphia Semiconductor Index is heading towards what would be its strongest quarter on record after surging nearly 70% in just two months.

Semiconductor shares have comfortably outperformed every other sector in the S&P 500 this year, and the gains have become so widespread that chip companies now dominate the list of the market’s best-performing stocks.

At the centre of the excitement is the booming demand for artificial intelligence (AI) infrastructure.

As technology giants race to build ever larger AI data centres, demand for specialised chips has exploded.

The biggest winners have been memory chip manufacturers, particularly those producing high-bandwidth memory (HBM), a crucial component used alongside advanced AI processors.

The share price gains have been remarkable, as Bloomberg pointed out. For instance, Micron Technology’s stock has more than tripled this year.

In Asia, South Korea’s SK Hynix has also risen more than threefold, while Samsung Electronics has more than doubled in value.

All three now have market capitalisations above US$1 trillion.

That scale of appreciation has inevitably attracted both believers and sceptics.

Supporters argue that AI is fundamentally reshaping the semiconductor industry, creating a new growth cycle that could last for years.

Critics, meanwhile, see signs of speculative excess, warning that investors may be extrapolating today’s growth too far into the future.

Many market participants appear caught somewhere between those two positions.

“You could see another leg up if you’re looking to buy here, but I keep going back to how volatile chips can be, and how everything can be great until it’s not,” Ed O’Gorman, chief executive and managing partner at River Wealth Advisors, told Bloomberg.

The debate carries significant implications because semiconductor companies have become increasingly important to the broader stock market.

Bloomberg noted that most of the S&P 500’s gains this year have been driven by just 10 companies, all within the technology sector.

Seven of those are semiconductor-related businesses, with Micron and Nvidia among the largest contributors.

Historically, investors have always approached chipmakers with a degree of caution because the industry is notoriously cyclical. Semiconductor production requires long lead times, often stretching months between orders and deliveries.

During periods of strong demand, that delay creates little concern. However, when demand weakens or supply overshoots, manufacturers can quickly find themselves burdened with excess inventory and collapsing profit margins.

Memory chips have traditionally been especially vulnerable because they are largely viewed as commodity products.

The previous memory-chip boom arrived during the pandemic, when consumers rushed to purchase laptops, tablets and other electronic devices.

Micron generated annual profits of US$8.7bil in 2022.

Yet only a year later, following a severe supply glut, the company reported a loss of US$5.8bil.

Management had warned of deteriorating conditions, but the downturn proved even worse than expected.

This time, however, investors are arguing that the rules may be changing.

HBM chips are significantly more complex to manufacture than traditional memory products.

They also have higher failure rates during production, which means they consume a disproportionate share of manufacturing capacity.

As a result, supply remains constrained even as demand continues to soar.

The consequences are being felt across the wider electronics industry.

Bloomberg reported that the rush to produce AI-focused memory chips is creating shortages in other markets, including smartphones and personal computers, as manufacturers prioritise their most profitable products.

The financial rewards have been extraordinary.

Analyst forecasts cited by Bloomberg suggest Micron’s earnings could reach US$66.8bil in 2026, rising sharply from an estimated US$8.5bil in 2025.

By 2027, net income is projected to approach US$120bil, a figure that would exceed forecasts for Amazon’s profits.

Such projections sit at the heart of the investment debate.

Are these companies experiencing a permanent shift in their earnings power, or are investors simply witnessing another cyclical peak inflated by AI enthusiasm?

The question extends beyond memory manufacturers.

Bloomberg Intelligence data indicates that profits across semiconductor-related companies in the S&P 500 are expected to double this year.

That growth rate is more than four times faster than the broader index.

Jorry Noeddekaer, head of global emerging markets and Asia at Polar Capital, believes the current cycle differs from previous ones, even if he stops short of declaring a permanent transformation.

According to Bloomberg, Noeddekaer argues that changes in the supply side of the industry, driven largely by the emergence of HBM, have altered market dynamics.

He also sees the possibility of longer-term supply agreements becoming more common, potentially helping chipmakers manage capacity and pricing more effectively during downturns.

For now, booming profits are helping justify much of the market’s enthusiasm.

Despite their enormous share-price gains, some memory companies still appear relatively inexpensive when measured against expected earnings.

Bloomberg noted that Micron and Sandisk trade at roughly 10 times projected profits over the next 12 months, compared with nearly 27 times earnings for the broader Philadelphia Semiconductor Index.

Yet those valuations come with an important caveat: they rely heavily on forecasts that assume the current boom will continue.

Using historical earnings instead of projected profits paints a very different picture.

On that basis, Micron trades at around 46 times earnings, while Sandisk commands a multiple of 58.

The semiconductor index itself trades at roughly 71 times trailing profits, making it the most expensive it has been since the years following the 2008 global financial crisis.

Valuations based on sales tell a similar story. Bloomberg reported that the index currently trades at 15 times revenue, the highest level in data stretching back to 2002 and more than three times its long-term average.

For investors, much depends on whether AI spending maintains its current trajectory.

The signs remain encouraging. Bloomberg reported that Amazon, Meta, Alphabet and Microsoft – the four largest purchasers of computing equipment globally – are expected to spend as much as US$725bil on capital expenditure in 2026, with the majority directed towards AI infrastructure.

Spending is projected to increase further in 2027.

Even so, there are emerging concerns.

Several of these companies are increasingly relying on debt financing to support their massive investment programmes, raising fresh questions about sustainability.

Kai Wu, chief investment officer at Sparkline Capital, summed up the dilemma facing investors.

“When it comes to chips, we only know when peak earnings were with hindsight,” he told Bloomberg.

For now, the AI revolution continues to provide powerful momentum. Yet semiconductor history is filled with periods of euphoria that eventually gave way to painful corrections.

Whether this cycle represents a lasting structural shift or simply a bigger version of the industry’s familiar boom-and-bust pattern remains one of the most important questions in global markets today.