Commentary: Chipmakers' AI boom is ignoring history
Ceaseless demand and structural supply constraints have pushed the stock market prices and profits of chipmakers like Nvidia to the moon. Can this continue?
FILE PHOTO: A Nvidia logo appears in this illustration created on August 25, 2025. REUTERS/Dado Ruvic/Illustration/File Photo
MIAMI, Florida: Semiconductors are pulling ahead of everything else in the stock market, including the vaunted hyperscalers that helped drive extraordinary returns from 2022 through 2025. The divergence is part of a high-stakes tussle among investors to pick the winners and losers of the artificial intelligence revolution.
In recent months, investors have piled into the companies getting rich from the technology right now - and grown less patient with those banking on big payoffs down the line. Still, history suggests the greater risk may be in assuming that today’s leading beneficiaries will remain on top.
A 144% MARKET RALLY
The S&P Semiconductors Select Industry Index - an equal-weighted gauge that treats behemoth Nvidia the same as much smaller players - has returned a staggering 144 per cent in the past year, crushing the 19 per cent advance for the equal-weighted S&P 500 and the 36 per cent gain for a basket of hyperscalers.
That’s by far their greatest outperformance since the artificial intelligence boom got under way. On a cumulative basis since the release of ChatGPT started the AI hype, semiconductors are about to catch hyperscalers - a term for the massive cloud service providers that own and operate the data centre infrastructure required to train and deploy large-scale artificial intelligence models - as the biggest beneficiaries.
It’s no exaggeration to say that semiconductors have put the US stock market on their backs: In 2026, the S&P 500 would only be up around 2.2 per cent, instead of the current 6 per cent if you zeroed out the gains from semiconductors.
And the advances are far from speculative. The sector is on pace for 83 per cent growth in earnings per share from a year earlier, early-season results show, driven by ceaseless demand and structural supply constraints that are pushing prices and profits to the moon. The gains have now spread from Nvidia, the maker of the most coveted and superior AI chips, to much more humdrum chips.
A LOOK AT HISTORY
Concerningly, however, history has shown that ultra-juicy semiconductor margins tend to lure more capacity to the market, which eventually leads to oversupply, making today’s 44 per cent net margins look suspiciously unsustainable.
It’s simply part of semiconductors’ DNA that their margins widen and narrow. Helped by smartphone adoption, they expanded for years after the financial crisis, only to cool dramatically thereafter. They boomed during the early years of COVID-19, too, as everyone’s lives went online, then shrank in 2022 when pull-forward computer demand waned and the supply glut arrived. The current margin expansion is already three years old, but could it really be that much different from prior experiences?
The “this time is different” crowd is convinced that the AI boom is no ordinary cycle. For one thing, the hyperscalers are engaged in an arms race, and demand looks strong at least through 2026.
Semiconductor “fabs” often take two to three years to build and get running. And AI itself is so technologically demanding that even the highly cyclical, “commodity-like” components - memory chief among them - aren’t as interchangeable as they were in previous cycles. The high bandwidth memory used for AI GPUs is essentially only produced by three companies globally. One of them, Micron Technology, is leading the charge among US semiconductor stocks.
WILL THE RALLY CONTINUE?
Nevertheless, the semiconductor family of stocks has seen such an extraordinary rally that a lot of upsides is already in the price.
Goldman Sachs Group’s Jim Covello, co-head of equity research, said last week that he recommends hyperscalers themselves as the better way to play the AI story these days. Microsoft, Oracle and Meta Platforms are all well below their recent highs and lagging the broader index.
That’s at least partially due to concerns that they’re spending too much with little to show for it. If they start to generate positive returns on their AI investments, the hyperscalers will have more upside than the semiconductor stocks, Covello reasoned.
If they cut back on spending, investors could celebrate that as well in the short term, as it would help shore up free cash flows, he reasoned. But it would be a major headwind to the semiconductor stocks.
Ultimately, you don’t have to be an AI doomer to worry that this semiconductor rally is due for a pause, or worse. For second and third-tier semiconductor companies to keep rallying like Beanie Babies in the 1990s, they’d need demand to remain at least this extraordinary and supply constraints to remain in place. Perhaps the demand really is as strong as we’re told but never bet against human ingenuity to sooner or later help meet it.
