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Chip Stocks Are Poised to Keep Rallying Despite a Detour

Superior earnings momentum for chip stocks remains intact, and they will likely continue to outperform small-cap shares. A setback for chips Wednesday and Thursday probably won’t last.

ASML’s third-quarter outlook — which missed estimates — sounded a warning on the sector Wednesday. But that’s likely due to the timing of revenue recognition rather than weak demand. In fact, three quarters of its orders came from logics chipmakers, suggesting strong intake from TSMC. That was confirmed by the Taiwanese chipmaker raising capex guidance on Thursday, another vote of confidence for AI demand.

Then there are new restrictions on China’s access to US semiconductor technology under consideration in the Biden administration. But the idea of limiting chip equipment makers’ services in China isn’t new. That pressure started at least from March, Bloomberg reported back then. A full ban on servicing in China would hurt only 3% of ASML’s revenue, Bank of America estimated.

History shows chip stocks did wobble short term when concerns over trade curbs surfaced, but it typically wouldn’t last. The SOX Index declined 8% in the first five days after US announced chip restrictions in October 2022, but the benchmark wiped out those losses and returned 12% in the next three months. Then the AI supercycle followed.

Now, semiconductor earnings are expected to rise 50% in the second quarter from the year before, based on the Bloomberg projections. The gain for the broad S&P 500 is seen at more than 9%. TSMC, the sole supplier of Nvidia’s most advanced chips, raised its sales outlook. ASML results contained a silver lining because its orders beat expectations as chipmakers locked in more high-end equipment. With earnings still holding up, the AI trade may be cooling but it’s not yet over.


 Head of Trading Dimitar Kalapov

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