Chip stocks experienced a tumultuous start to September, as concerns over U.S. economic growth and a loss of momentum in artificial intelligence favorite Nvidia led to their worst stretch in over four years. The VanEck Semiconductor ETF (SMH) plummeted by 11.7% in the Labor Day-shortened, four-day trading week, marking its most significant decline since March 2020. This sharp drop is just the latest event in a summer filled with volatility for the semiconductor sector.
The semiconductor industry is known for its cyclical nature, closely tied to the fluctuations of the economy. With the added excitement around artificial intelligence, chip stocks have been subject to significant swings in recent months. Despite these challenges, analysts on Wall Street remain optimistic about the long-term prospects of the sector. Even in the face of recent turmoil, there is a consensus to “Just Keep Truckin’ On” and maintain an overweight position in semiconductors, as stated by Cantor Fitzgerald analyst CJ Muse.
Although some chipmakers, such as Intel, have faced struggles like layoffs, much of the recent sell-off in chip stocks appears to be disconnected from business fundamentals. For instance, Broadcom experienced a 10.4% decline in its stock price, despite exceeding analysts’ earnings and revenue estimates. Analysts like Stacy Rasgon have pointed out that the company’s non-AI semiconductor businesses are showing signs of recovery, with growing orders and an optimistic outlook for the future.
In response to the evolving landscape of the semiconductor industry, VanEck introduced a narrower version of its semiconductor ETF – the VanEck Fabless Semiconductor ETF (SMHX). This new fund focuses on companies that design chips but do not engage in large-scale manufacturing. Inspired by the asset-light business model of Nvidia, the SMHX aims to capture companies with similar structures that prioritize innovation and flexibility.
Impacts of the Summer Sell-Off
The recent sell-off in chip stocks has affected a wide range of semiconductor companies, with both broad sector funds like SMH and more focused funds like SMHX experiencing significant declines. Even as some chip stocks rebound, market uncertainties continue to pose challenges for the sector. Investors will be closely monitoring updates from key chipmakers at upcoming conferences to gain insights into the future trajectory of the industry.
The semiconductor industry’s journey through the current market turbulence reflects the complex interplay of economic factors, technological advancements, and investor sentiment. While chip stocks face challenges in the short term, the long-term outlook remains hopeful, driven by the ongoing demand for innovative technologies like artificial intelligence. As the industry navigates through these uncertain times, it is essential for investors to stay informed and adaptable to capitalize on future opportunities in the semiconductor market.