Benzinga - by Neil Dennis, Benzinga Staff Writer.
Semiconductor stocks have fallen in the first two trading sessions of 2024. Is this a sign of a strained market with valuations running too hot and prompting investors to take profits?
Bank of America said it remained bullish on the Philadelphia Semiconductor Index (SOX) for 2024, despite its 65% gain in 2023.
The iShares Semiconductor ETF (NYSE:SOXX), an exchange traded fund that tracks the Philly Semiconductor Index, fell 5.4% over the past two sessions but, like the index it tracks, was up 65% in 2023.
“The key question for investors,” said BofA analyst Vivek Arya, “is whether 2024 will bring more of the same, or rotation into last year’s laggards.”
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Risks And Reasons To Be Bullish
- Premium valuations: The Philly Semi is currently trading at a price earnings ratio of 25x, compared with the S&P 500’s 20X
- Market rotation: Away from high beta technology stocks
- Market volatility: Influenced by geopolitics, trade conflicts and upcoming elections
- New upcycle: With expectations of around 15% industry sales growth in 2024. Upcycles last 2-2.5 years, he added.
- Generative Artificial Intelligence — or GenAI: This is in its early stages and it’s too soon to predict a peak
- U.S. CHIPS Act: Could provide new sources of funding for semiconductor manufacturing
BofA’s Top Themes For 2024
- As GenAI starts to become monetized BofA sees stocks such as Nvidia Corp (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), Advanced Micro Devices Inc (NASDAQ:AMD) and Marvell Technology Inc (NASDAQ:MRVL) as best placed to benefit
- U.S. CHIPS Act grants will benefit the stocks most exposed to increasing output from China. The U.S. government has pledged around $280 billion to boost domestic research and manufacturing. BofA believed the stocks that would benefit most include Intel Corporation (NASDAQ:INTC), Texas Instruments Inc (NASDAQ:TXN) and Micron Technology Inc (NASDAQ:MU)
- Industrial chip inventory correction could last through the first quarter.
SOX Continues To Outperform After Strong Year
The chart below shows that since 1995, the index exceeded 35% annual gains 10 times and delivered double-digit gains following six of those.
Arya concluded secular tailwinds persisted: “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.”
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