(Bloomberg) — Chipmakers are by far the hottest stocks in the market, but their recent surge is lending urgency to the debate over whether investors are buying into an artificial-intelligence bubble that’s due to burst.
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The Philadelphia Stock Exchange Semiconductor Index is on pace for its best quarter ever after soaring 69% in the past two months. Chips are the best performing sector in the S&P 500 Index this year by a wide margin. The gains have gotten so extreme and widespread that the group is now heavily represented among the benchmark’s leading stocks.
The most dramatic moves are coming from the memory side of the business, where overwhelming demand for high-bandwidth chips used in AI data centers is sending prices skyrocketing. Micron Technology Inc.’s shares have more than tripled this year. In Asia, SK Hynix Inc. has soared 260%, and Samsung Electronics Co., the world’s biggest maker of memory chips, is up 165%. All three now have market capitalizations above $1 trillion, meaning taken together they’re suddenly worth more than the Magnificent Seven’s Meta Platforms Inc. and Tesla Inc. combined.
This is where the debate comes in. Bulls see a boom driven by structural changes that are transforming the notoriously cyclical semiconductor industry. Bears see an overheated market fascinated by the latest shiny object. And investors are caught in the middle, transfixed by the momentum, but wary of what could come next.
“You could see another leg up if you’re looking to buy here, but I keep going back to how volatile chips can be, and how everything can be great until it’s not,” said Ed O’Gorman, chief executive and managing partner at River Wealth Advisors, which holds positions in semiconductor giants Nvidia Corp. and Broadcom Inc.
The stakes are high because the stock market has become so reliant on chipmakers for growth. Almost 80% of the S&P 500’s 11% gain this year is coming from just 10 companies — all are in technology and seven are semiconductor stocks. The two biggest contributors are Micron and Nvidia.
The chip industry is considered cyclical because it regularly goes through booms and busts. The time from an order being placed to when it’s delivered can be months. When demand is strong, that’s not a problem. But when the economy sours or orders slow due to over-supply, chipmakers are often left with cratering earnings from bloated inventories and weak pricing.
This is most acute for memory makers since their products are commodities. The previous memory chip boom was during the pandemic lockdowns when consumers rushed out to buy electronic devices. In 2022, Micron’s annual profit hit $8.7 billion. In 2023, it reported a loss of $5.8 billion because of a supply glut that management warned was coming but turned out to be worse than even they expected.
The rise of high-bandwidth memory chips has changed the equation somewhat, as they’re harder to make and have a higher failure rate. That means they take up an outsized chunk of industry production capacity, placing an even bigger strain on companies’ ability to meet demand. This is causing shortages in other key markets such and smartphones and personal computers.
The profits being generated by makers of memory chips right now are staggering. Micron’s earnings are projected to jump to $66.8 billion in 2026, up from $8.5 billion in 2025. In 2027, net income is expected to be about $120 billion, more than Amazon.com Inc. is expected to deliver.
Which gets to the heart of the debate: Can the companies sustain this growth because something has been permanently altered, or is this a massive cyclical blip? The conversation goes beyond memory to the broader chip industry. Profits for semiconductor-related companies in the S&P 500 are projected to double this year, more than four times what’s expected for the benchmark as a whole, according to data compiled by Bloomberg Intelligence.
“We are not in the ‘this time it is totally different’ camp, but we are firmly in the ‘higher for longer’ camp,” said Jorry Noeddekaer, London-based head of global emerging markets and Asia at Polar Capital, which owns positions in memory chip stocks like Micron and Sandisk Corp. “The supply side has changed meaningfully with the evolution of high-bandwidth memory, and demand remains strong. We also see a plausible scenario in which longer-term contract pricing structures emerge, reducing cyclicality and allowing for better capacity and pricing management on the downside.”
Soaring profits have helped keep memory chipmakers’ stock market valuations in check despite the rally. Indeed, Micron and Sandisk look downright cheap at around 10 times earnings over next 12 months, compared with the Philadelphia semiconductor index, which trades at almost 27 times.
However, those valuations are based on the assumption that this boom is going to last. Using trailing profits, valuations look much more extreme, with Micron trading at a multiple of 46 and Sandisk at 58. The semiconductor index is around 71 times profits, the most expensive since the aftermath of the 2008 financial crisis. And at 15 times sales, it’s at the highest in data going back to 2002 and more than three times the average over that span.
“When it comes to chips, we only know when peak earnings were with hindsight,” said Kai Wu, chief investment officer at Sparkline Capital, whose exchange-traded funds hold chipmakers including Intel Corp. and NXP Semiconductors NV. “It all comes down to: To what extent can we expect the AI buildout to continue? If it does go on, then chips will probably continue doing well. But there’s also a chance that we’re getting over our skis.”
The spending backing the boom looks durable, at least for now. The four biggest buyers of computing equipment — Amazon, Meta, Alphabet Inc. and Microsoft Corp. — expect to plow as much as $725 billion into capital expenditures in 2026, with most of it going toward AI data centers. And they plan to spend significantly more in 2027. However, the companies are starting to use more debt to fund the spending, which raises a whole new set of questions.
“It seems likely that there’s bound to be a plateauing of spending, at a minimum, even if it is at a higher absolute level than it was before,” said River Advisors’ O’Gorman. “We know chips experience cycles and boom-bust behavior. And that’s still the case when you have something with massive growth.”
–With assistance from Ian King and Youkyung Lee.
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