The iShares Semiconductor exchange-traded fund is up 12% this year, outperforming the S&P 500’s almost 6% gain. Like many areas of the market, “the Soxx,” as it is commonly called, has more than recovered the losses it suffered in April, when President Donald Trump unveiled heavy tariffs, only to roll some of them back, at least temporarily.
Chip stocks have tended to outperform when the market rises. Many are increasing their earnings faster than the S&P 500’s aggregate profits. Several make artificial intelligence chips, which remain in growing demand from tech companies building data centers. The growth of AI spending is only a few years old, and likely has many more years before the industry reaches maturity.
That means that as long as the market believes the economy will continue to grow, that inflation and interest rates won’t jump and disrupt the expansion, companies will keep investing in AI. The corollary of that is continued gains for chip shares.
Investors’ optimism can be seen in the fact that the Soxx reclaimed its 50-day moving average in early June, and has since jumped above it. The fund is now at $242, while its 50-day moving average is $211. The price is on a long-term uptrend over the past several years, even though it tends to see a brief pullback when it moves too far above that average.
“I see the distance versus the 50-day moving average as confirmation of [up] trend,” says John Kolovos, Macro Risk Advisors’ chief technical strategist. He expects the Soxx to move above $300 in less than a year.
Those gains, though, are likely to come from select stocks. A few that are especially well-positioned to maintain their gains are Nvidia, Broadcom, and Taiwan Semiconductor.
Nvidia, up 14% this year and hitting records, may be obvious, but isn’t to be ignored. It is the dominant player making general-purpose AI chips for the likes of Microsoft, Meta Platforms, and other Big Tech customers.
Analysts expect Nvidia to see $93.9 billion of sales this year, according to FactSet, with over $173 billion coming from the data-center market, representing 58% year over year growth. While the growth will slow down in 2026, it is expected to remain in the double digits annually for the five years after 2025. Nvidia’s total revenue is expected to grow 16% annually over that span.
This will spur high earnings growth. Even though gross margins are forecast to dip partly because other AI chip suppliers are pressuring prices, operating costs won’t balloon enough to disrupt the earnings picture. Earnings per share are expected to grow 17% annually over the coming five years.
Broadcom is another one to own. The stock is up 16% this year and has hit new highs.
It’s another dominant player in AI chips, with a growing portion of its $65 billion in expected sales this year coming from data-center customers. Earnings per share are expected to grow 25% annually for the coming three years.
Taiwan Semiconductor has seen its stock gain 16% this year. With $31.7 billion of sales expected this year, it has most of the market for the components it sells to chip makers such as Nvidia and others. As chip demand goes, so goes Taiwan Semi’s demand, so it benefits from the data-center growth trend. Analyst sees EPS growing 29% annually for the next three years.
“I feel much better about it because it’s a bet on semiconductor demand,” said Lukas Tomicki, portfolio manager at LRT Capital Management. He prefers to avoid Advanced Micro Devices.
The stock’s 15% rally this year has been less about the strength of its own business and more about broader enthusiasm investors have for owning AI chip stocks, he noted.
For many quarters, while its AI business has been exploding, it has disappointed the market’s expectations. The market needs proof its chips can one day be almost as effective as Nvidia’s in order for it to remain richly valued and be seen as a company that can sustain high growth for a long time.
Until then, the stock is vulnerable to the type of underperformance versus the rest of the AI chip universe it has seen for over a year. Its rally “is frankly just an industry thing,” said Tomicki. “I have zero interest in trying to figure out AMD.”
But the chip business at large is in a solid position. Stick with the consistent winners.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
