- Silicon chip stocks zoom higher thanks to their status as picks and shovels plays on AI
- Thirty-stock SOX index expected to generate rapid earnings growth in 2026, 2027 and 2028
- Semiconductor industry revenues set a record high in 2025, and new peaks are expected in each of the next three years
- SOX now trades at a big valuation premium to the S&P 500
- Capex looks under control but watch inventory and trade receivables on balance sheets as an early warning sign of any trouble ahead
- Nvidia’s first-quarter results on Wednesday are the next test here
“Silicon chips sit at the centre of so many powerful market narratives – tariffs and trade, security of national supply chains, the race for technological supremacy, data and artificial intelligence. That’s why the makers of these vital devices and the equipment that produces them are leading US equity markets higher,” says AJ Bell investment director Russ Mould.
“This can be seen in the stunning surge in the SOX, the Philadelphia Semiconductor index, although the benchmark is taking a breather as Nvidia’s quarterly results approach, bond yields rise and investors ponder not just earnings momentum but also valuation.
“The 30-stock SOX is up by nearly 60% since the end of March and last week’s closing peak of 12,081 represents a new all-time high – and one that manages to exceed the tech, media, and telecoms (TMT) bubble peak back in 2000 by a factor of nine.
Source: LSEG Refinitiv data.
“The SOX comprises makers and designers of both silicon chips and semiconductor production equipment (SPE) and has a following among investors for two reasons:
- First, by dint of their ubiquity, silicon chips offer a good insight to global economic activity. The industry has grown revenues at a compound annual growth rate of 8.6% since 1980, thanks to the ever-growing list of products and devices that contain them and also greater silicon content per item. Worldwide sales reached a record of nearly $800 billion in 2025, an increase of a quarter on the year before, and semiconductors are everywhere, from tablets to laptops, cars to robots, smartphones to servers and smart meters to medical equipment. A further advance of almost two-thirds, to $1.3 trillion, is the analysts’ consensus forecast for 2026.
Source: WSTS, SIA, Gartner.
- Second, the SOX has a decent history as a proxy for global risk appetite in financial markets. Chip and chip-making equipment firms are generally traded as momentum stocks, surging as earnings estimates rise and recoiling if they fall, thanks to how operationally geared they are. Even a small percentage change in sales leads to a much bigger percentage change in profits, thanks to the fixed costs associated with research and development and, in some cases, the hugely capital-intensive nature of the business (a state-of-the-art semiconductor fabrication facility, or fab, now costs billions of dollars).
“The SOX peaked around six months before the wider American S&P 500 and FTSE All-World indices did at the equity market peaks of 2000 and 2007, and troughed about six months before they did, too, in 2002 and 2008.
Source: LSEG Refinitiv data.
“Chip and SPE stocks have roared ahead in 2026 and left the S&P 500 trailing in its wake, as investors have sought out ways to play the AI capex boom and landed upon the SOX’s members, who are key providers of the memory and computing power needed for the data centres that in turn provide learning and inference for large language models. In sum, investors have decided they are the perfect providers of picks and shovels, and thus potentially a safer way to play the spending surge than trying to select winners between Microsoft, Alphabet, Amazon, Anthropic, OpenAI and more as they all jockey for position and market leadership.
“There is logic to this, too, given the SOX members’ financial performance. In 2025, their aggregate sales rose by 30% to a record $784 billion and their combined net profit grew by 61% to $269 billion, a sixth straight annual record.
“Analysts’ consensus estimates for the SOX’s constituents are looking for further rapid increases in sales and net profit in each of 2026 and 2027, buoyed by Nvidia, a turnaround at Intel and talk from the three major DRAM makers, of whom index member Micron is one, that they are drawing up two-year contracts for customers to address shortages of supply.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts.
“However, even those forecasts put the SOX’s members on a combined forward price/earnings ratio of 26 times for 2026, 19 times for 2027 and 17 times for 2028, all premium ratings relative to the S&P 500.
“The SOX price chart also looks spookily reminiscent of mini-bubbles and meteoric price increases at different stages this decade in cryptocurrencies, non-fungible tokens, meme stocks, nuclear power plays, defence companies and more, so perhaps the biggest danger is that the hot money flows suddenly go cold, for whatever reason.
“However, bulls will argue that the valuation premium is justified given the SOX’s growth profile, but the semiconductor and SPE industries are notoriously cyclical, as booms give way to busts. Supply catches up with demand, or demand disappoints as end markets fail to live up to the hype, buyers double-order chips in efforts to get supply and finally over-do it, or rising prices oblige device makers to seek new ways of designing their products. As ever, the best cure for shortages and high prices tends to be high prices, as they ultimately crimp demand and fuel supply.
“There are arguments that it may be different this time, owing to AI and the associated spending boom, and to how Moore’s Law may be reaching, or has already reached, its physical limits, with the result that the number of transistors on a physical circuit may no longer double every 18 months, and thus limit supply growth.
“Even so, that valuation premium is one potential hurdle to further massive gains in the SOX, and the industry’s inherent cyclicality owing to its capital intensity and economic sensitivity is another. Analysts’ forecasts of record high operating margins across the Philadelphia Semiconductor index in each of 2026, 2027 and 2028 leave little margin for error and any whiff of downgrades tends to lead to an unravelling of the SOX.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts.
“The good news is that capital expenditure budgets do not seem excessive, as capex-to-sales ratios are nowhere near historic peaks.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts.
“As such, the first warnings signs of trouble – if trouble is going to come – will show up in the balance sheets and cash flow statements of the SOX index’s 30 constituents, in the form of higher inventory and higher trade receivables.
“Inventory growth that exceeds sales growth can mean end-demand is slowing, though it can also signify preparations for a new product launch. Inventory days have crept up, but not to the levels that heralded earnings downgrades and a near-50% high-to-low slump in the SOX as recently as 2022, and Nvidia’s results on Wednesday will have a major impact on the final totals.
Source: Company accounts. *Analog Devices, Applied Materials, Broadcom, Microchip and Nvidia are yet to report.
“Higher receivables can be a sign of so-called channel stuffing, where a manufacturer gets customers to take on a lot of product right at the end of the quarter and books the revenues without receiving payment. There is nothing illegal about this, but it can again be indicative of slower-than-expected demand, so no matter how dazzling the profit and loss account, always check the balance sheet and cash flow, something that quarterly reporting permits.
“The good news is that days receivable across the SOX did not look abnormal at the end of 2025 and first-quarter.”
Source: Company accounts. *Analog Devices, Applied Materials, Broadcom, Microchip and Nvidia are yet to report.
