The excitement around artificial intelligence (AI) has propelled chipmakers like Nvidia Corp. (NVDA, Financial) to the forefront, significantly impacting the S&P 500 Index rally. However, the soaring stock prices have made these shares expensive, introducing a new layer of risk for future gains in the broad equities benchmark.
According to Max Wasserman, a senior portfolio manager at Miramar Capital, while large-cap chip stocks are favored, their current high multiples make the broader U.S. stock market more vulnerable to a sell-off. The Philadelphia Stock Exchange Semiconductor Index's valuation, for instance, is around eight times sales—the highest in over two decades, overshadowing the S&P 500's price of approximately three times sales.
Notably, companies such as Nvidia (NVDA, Financial), Broadcom Inc. (AVGO, Financial), Advanced Micro Devices Inc. (AMD, Financial), and Micron Technology Inc. (MU, Financial) have driven about a third of the S&P 500's gains this year. This surge has placed chipmakers, which now constitute over 10% of the S&P 500's weighting, in a position of unprecedented influence over the index.
The semiconductor industry is known for its cyclical nature, marked by periods of oversupply and shortages. Currently, the sector is experiencing a boom, driven by a rush to acquire chips that enhance AI computing capabilities. However, the duration of this boom remains uncertain.
Despite the positive outlook on chip stocks, Matt Lloyd, chief investment strategist at Advisors Asset Management, cautions that the high expectations already reflected in their prices might take time to materialize. For instance, Nvidia's revenue is expected to increase by 81% in its current fiscal year, contrasting sharply with its flat sales just two years ago. Similarly, Micron saw its revenue halve from fiscal 2022 to 2023, and AMD, celebrated for its AI chip, was unprofitable as recently as 2016.
The volatility in the semiconductor sector starkly contrasts with the stability offered by tech giants like Apple (AAPL, Financial), which have traditionally been seen as safer investments. Meanwhile, the escalating stock prices, driven by lofty valuations, led Wasserman to reduce exposure to Broadcom (AVGO, Financial), opting to secure profits as the stock's value surged in the portfolio.
Wasserman warns traders against the assumption that chip stocks will continue their upward trajectory indefinitely. He emphasizes the importance of evaluating the risk versus reward at their current valuations, suggesting a more cautious approach may be warranted.
