The strongest quarter in semiconductor history: a simultaneous display of celebration and intense turmoil

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The semiconductor sector is closing the strongest quarter in history, as the frenzied demand for AI infrastructure has pushed chip stocks to unprecedented heights. However, the accompanying sharp volatility has made this celebration more complicated—investors are questioning whether the rally can be sustained while also digesting round after round of unpredictable swings.

The Philadelphia Semiconductor Index surged 81% in the second quarter, set to record its strongest quarterly performance ever, and its gain for the year has risen to 94%. If maintained, this would mark the best annual performance since the 1999 internet bubble. In comparison, the tech-heavy Nasdaq 100 gained 25% in Q2, and the S&P 500 rose 14%, with chips far outpacing the broader market.

Yet, just as the celebration reached its peak, last week’s concentrated sell-off poured cold water on the market. The Philadelphia Semiconductor Index plunged 7.9% last week, marking its biggest weekly drop since April 2025, with concerns over memory chip pricing and OpenAI’s IPO prospects as the main triggers. This Monday, the index remained highly volatile, dropping as much as 3.2% during the session before closing up 3.8%.

Cantor Fitzgerald Senior Managing Director and Technology Analyst CJ Muse stated, "The main theme of the last six months has been the market’s full-on bet on AI infrastructure, but now people are questioning whether this is sustainable and whether we should be worried."

Memory Rules, Nvidia Unexpectedly Lags

The biggest winners over the past six months were not the initially expected AI chip champions, but rather memory and storage companies.

The S&P 500 leaderboard is dominated by memory and storage firms. America's largest memory chip manufacturer, Micron, has soared 301% this year, with its market cap surpassing $1 trillion, making it the second-strongest performer in the S&P 500 this year; ranking first, SanDisk skyrocketed 764%. Western Digital, Seagate and Intel round out the top five, with Intel up 257%, as Wall Street increasingly believes its ambitious turnaround is taking shape. Additionally, Korean memory giant SK Hynix is seeking a US listing, aiming to raise $29.4 billion.

"We see investors chasing the bottleneck link in semiconductors, which currently benefits memory and Intel’s revival as a foundry," said Sean Sun, portfolio manager at Thornburg Investment Management, who holds several semiconductor stocks.

In stark contrast, AI chip synonym and world’s largest company Nvidia has only risen 4.5% this year, making it the weakest performer in the Philadelphia Semiconductor Index; Broadcom, America’s second-largest semiconductor company, has also shown lackluster performance, up only 7.6% year-to-date.

"Nvidia and Broadcom are constrained by bottlenecks and are no longer the highly flexible plays they once were," says Sean Sun. "I think they’ll continue to do well, but investors now want exposure that’s closer to the most dynamic themes."

Valuation Expansion, but Not Excessive

The Philadelphia Semiconductor Index’s current forward P/E is about 26x, well above the 10-year average of 19x, and not far from its recent high of 30x in 2024. By comparison, the Nasdaq 100’s forward P/E is 23x and the S&P 500 is 20x.

According to Bloomberg Industry Research, analyst optimism for chip company prospects is rising. Market expectations are for chip company earnings to grow 49% by 2027, a substantial upward revision from the 35% forecast in April; revenue growth is expected at 37%, up from 29% consensus at the end of April. This growth far exceeds the S&P 500—whose 2027 expected earnings growth is only 17%, with revenue up 7.4%.

Clear valuation divergence exists within the sector. ARM’s forward 12-month P/E exceeds 140x; Intel’s is around 100x—severely overvalued by traditional standards. Nvidia’s forward P/E is only 18x, its lowest since 2018 and well below the 10-year average of 36x; Micron’s forward P/E is about 8x, with some on Wall Street viewing its low valuation as a warning that revenues and earnings may have peaked.

Sean Sun said, "Some chip stocks may be priced for perfection, with limited margin for error, but overall, I would describe current valuation as 'expanded but not excessive.' Considering sector growth and upbeat outlook, I’m not worried by these valuations."

Record Volatility, Swings May Be the New Normal

High yields and high volatility are now inseparable.

The Cboe Semiconductor ETF Volatility Index has risen 83% this year, set to record the largest annual increase ever. This indicator is now well above the 10-year average, reaching its highest since the Trump tariffs shocked markets in April 2025.

Recent trading data shows that the Philadelphia Semiconductor Index has had only one day this month where the closing change was less than 1%, with daily gains as large as 7.9% and drops exceeding 10%. According to Goldman Sachs prime brokerage data, hedge funds are selling TMT stocks at the fastest pace in a decade, while the frequent switching of retail investor sentiment is further amplifying these swings.

On the demand side, Microsoft, Amazon, Alphabet, and Meta are sticking to aggressive capital spending plans; but hardware makers like Apple have been forced to raise product prices citing high memory chip costs, raising analyst concerns about end demand pressure. At the same time, reportedly OpenAI is considering delaying its IPO plans, and given its key purchasing role in AI chips, this is seen as a potential risk warning.

"Investor composition is changing, which is exacerbating volatility, and meanwhile, almost every week a new white paper detailing fresh AI capabilities is published," says CJ Muse. "We’ll be living in this highly volatile market for quite a while."

Risk Warning and DisclaimerThe market involves risk; investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions herein fit their own circumstances. Any investment based on this article is made at the user’s own risk. ```