US Chip Stocks Drop Sharply After Strongest Year Since 2009, Raising Recession Concerns

Wednesday saw U.S. chip stocks extend their losing run as Wall Street's main semiconductor benchmark dropped from record highs following the sector's strongest year since 2009, when it emerged from the financial crisis.

The PHLX semiconductor index (.SOX) dropped 2.1%, with losses of over 2% seen by Advanced Micro Devices (AMD.O), Qualcomm (QCOM.O), and Broadcom (AVGO.O). 

Since closing on December 27, when the chip index reached a record high, it has already decreased by over 7%.

This week's decline in semiconductor stocks has mirrored a broader sell-off on Wall Street as traders await the release of the Federal Reserve's December meeting minutes, which are anticipated later on Wednesday and might offer some guidance on the organization's future course for interest rates.

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PHLX Surges 65% in 2023 Amidst Fed Expectations, AI Enthusiasm

The enthusiasm around artificial intelligence and expectations that the Fed will cut interest rates this year have led to the PHLX's greatest gain since 2009, of 65% in 2023. In comparison, the S&P 500 (.SPX) and Nasdaq (.IXIC) had yearly increases of 24% and 43%, respectively.

Semiconductor stocks have also benefited from bets that the global demand slump of last year, which forced memory chip manufacturers to cut output, has essentially bottomed out.

Considered the industry leader in artificial intelligence-related semiconductor supply, Nvidia (NVDA.O) witnessed a threefold increase in its stock market value to $1.2 trillion in 2023, making it the sixth most valuable company on Wall Street. Wednesday saw a roughly 1% decline. 

BofA Global Research analyst Vivek Arya suggested in a client note that investors should be exposed to cloud computing and automobiles through stocks such as Marvell Technology (MRVL.O), NXP Semiconductors (NXPI.O), ON Semiconductor (ON.O), and Nvidia. Additionally, Arya suggested stocks such as KLA Corp (KLAC.O) and Arm Holdings (O9Ty.F) to hedge against the growing complexity of chip designs.

Additionally, Wells Fargo analyst Joe Quatrochi stated that he believes the market for chip equipment sellers would see a subdued rebound in 2024 and recommended Applied Materials (AMAT.O) and KLA as top investments in that sector.

SOX Maintains Its Performance After a Good Year

BofA pointed out that despite the Philly Semi index's strong 2023 surge, traditionally it has outperformed after such increases.

The graph below demonstrates that, since 1995, the index has produced double-digit increases six times and topped 35% yearly gains ten times.

"Continued adoption and investment in AI infrastructure, growing chip design complexity, automotive semiconductor content proliferation, and government focus on silicon independence will continue to drive the sector in 2024," Arya said, citing the persistence of secular tailwinds.

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