- Demand for silicon chips and semiconductor production equipment continues to surge thanks to the AI spending splurge
- Philadelphia Semiconductor Index, the SOX, stands at all-time highs
- Leading chip and SPE producers are even putting up the ‘sold out’ signs for 2026
- But similar behaviour helped to unwittingly call the top of the tech, media and telecoms bubble in 2000, simply because it meant the news could not get much better
“The economist John Kenneth Galbraith once cautioned about what he termed the ‘extreme brevity of the financial memory,’ and argued that past lessons, and financial market disasters, were usually forgotten within about twenty years, not least because those involved in the previous episode have usually either retired, been pensioned off or simply dismissed as old fogeys,” says AJ Bell investment director Russ Mould.
“In this context, the boom in AI-related stocks is an interesting test of Galbraith’s theory, as the technology, media and telecoms (TMT) bubble topped out in spring 2000, and there are some uncanny echoes between what happened then and now.
“The lesson that markets may just be forgetting this time is how the first cracks in the TMT boom appeared, and share price momentum began to slow, when companies further down the food chain began to announce they were sold out for a year, or even two years ahead. Passive component, silicon chip and semiconductor production equipment (SPE) companies, and their laser and lens and component providers, all flagged big order intake and fat backlogs, and in the process, gave reassurance and visibility on the durability of the expected surge in future sales and profits.
“This matters now, because leading suppliers such as AI graphics processing unit (GPU) leader NVIDIA, DRAM makers SK Hynix and Samsung Electronics, silicon chip foundry Taiwan Semiconductor Manufacturing Company, and semiconductor production equipment (SPE) maker ASML are all saying they are, in effect, sold out for 2026, at least for their leading-edge products.
“That all sounds great, but similarly bullish noises did not work out as expected when the TMT bubble burst, for three reasons.
“First, components shortages began to gum up the works for end-customers, who could not ship finished equipment and systems as fast as their customers wanted, they hoped, and markets expected.
“Second, in response to this, customers had begun to double-order in their scramble to find supply of vital components. That bloated order books to deceptive levels and once the market softened fat backlogs disappeared far more quickly than expected, as orders were cancelled, not confirmed.
“Finally, share prices began to yawn. The logic was that if a company was sold out for 12 to 24 months, then there could be no more incrementally good news, or earnings upgrades, for 12 to 24 months. That was an eternity for momentum-driven markets, which craved upgrades, not least to justify prevailing lofty valuations, and prompted some investors to start to look elsewhere. After all, if the news could not get better, then the danger was the next development was that it could get worse, and if the news got worse than valuations would be exposed on the downside.
“As it turned out, global sales of silicon chips and semiconductor production equipment (SPE) peaked in 2000, and then fell in 2001 and 2002, as the spending boom further up the food chain in fibre optic broadband, telecoms equipment and 3G mobile telecoms networks turned into a temporary, but enormous, bust.
“The chip and chip-equipment makers were among the last to find out, as they were further down the food chain, as telecoms company spending cuts filtered through to telecom equipment makers, then to their sub-suppliers such as the semiconductor and passive component companies, and then to their suppliers, such as the providers of SPE.
Source: SEMI, SIA, Gartner
“The NASDAQ and S&P 500 indices collapsed as the downturn hit, and the Philadelphia Semiconductor Index, or SOX, suffered a rout too. Indeed, the SOX turned down first, because of how the incremental good news dried up as backlogs rose, and it will be interesting to see if this process repeat itself, should the AI boom cycle also give way to a bust.
Source: LSEG Refinitiv data
“The SOX’s thirty constituents, all leading silicon chip or semiconductor production equipment (SPE) providers, could just be a good guide as to whether the good times are going to keep rolling or whether there is going to be trouble ahead, for two reasons.
“First, they are momentum stocks extraordinaire, in that they feed off positive earnings momentum, in the form of estimate upgrades, and recoil from negative momentum and downgrades. They are generally very operationally geared, as small changes in sales turn into a much bigger change in profits, up or down.
“Second, they are so ubiquitous that they are a pretty good guide to global economic activity, in that silicon chips are everywhere from smartphones to smart meters, cars to robots, and laptops to server-packed datacentres.
“The good news right now is the SOX sits at pretty much an all-time high, above 8,000, but any wobbles must be watched, given how the semiconductor industry benchmarked lower before the wider equity indices ahead of the bear markets of 2000-2003 and 2007-2009 and before the inflation-and-interest-rate scare of 2022. Equally, it turned up first, ahead of the bull markets of 2003-07, 2009-20 and then again in 2022.
“The SOX remains buoyant, even though the combined stock market valuation of the Magnificent Seven has started to flat-line, in contrast to the gallop that really began once OpenAI launched ChatGPT in November 2022, to kick off the AI arms – and spending – race.
Source: LSEG Refinitiv data
“Meta and Microsoft have both just upgraded their capital spending budgets for 2026, yet again. Meta’s shares went up (in contrast to the hammering they took after autumn’s budget hike) and Microsoft’s went down, so it will be interesting to see what Amazon and Alphabet have to say on the topic alongside their latest quarterly results.
“Markets are no longer blindly rewarding increases in capex, and they are looking for an acceleration in revenue growth as evidence that this spending is going to generate the sort of returns on capital to which shareholders have become accustomed from these technology giants.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Alphabet, Amazon, Meta Platforms, Microsoft and Oracle.
“Any whiff of a slowdown in capex budgets, let alone cuts, could cause tremors further down the food chain, if the spending splurge fails to deliver – and that is where the silicon chip and SPE companies come into the equation. They may well find out later if there are capex cuts, or further hikes, to come, although their share prices are likely to take their cue from spending announcements further up the chain, and then respond to softer, leading indicators such as changes in order backlog and the book-to-bill (or new orders-to-sales) ratio, as well as any signs of a slow down in orders and shipments in the balance sheet and cash flow, such as higher inventories and higher trade receivables.
“There is no sign of this yet but bulging backlogs and ‘sold out’ signs were the very earliest signs of what turned out to be trouble in 2000, even if orders, sales and profits only took a hit in 2001 and 2002.
“NVIDIA’s share price does seem to be pausing for thought, however.
Source: LSEG Refinitiv data
“This comes after a period of massive outperformance, relative to both the SOX and the S&P 500:
Source: LSEG Refinitiv data. ChatGPT launch 30 November 2022
“NVIDIA does not make its own chips. It outsources that process to TSMC, the world’s leading foundry, or subcontract manufacturer. TSMC’s share price is showing no qualms of any kind, as we start to move further down the food chain and away from the biggest spenders, the hyperscalers, and their data centres toward the vital components that power them and make them work.
Source: LSEG Refinitiv data
“The galvanising effect upon TSMC’s stock of the launch of ChatGPT is easy to see.
Source: LSEG Refinitiv data. ChatGPT launch 30 November 2022
“The AI boom has also brought a bounty to the makers of volatile and non-volatile memory chips, or DRAM and flash (NOR and NAND) chips, which are key sources of data storage capacity: volatile works only when the power is switched on, non-volatile works when power is switched off.
“The DRAM and NAND markets have largely consolidated into three players. After a multi-decade dogfight between Japanese, Korean, Taiwanese, American and European producers in this commodity market, where low-cost production and price and were key weapons, the three leaders are now Micron of the USA and Samsung Electronics and SK Hynix of Korea. Samsung is not a pure play on memory chips, but its sales, profits and share price have all done well, even if they may not have quite gone into orbit to the same degree as those of the other two.
Source: LSEG Refinitiv data
Source: LSEG Refinitiv data
“Again, autumn 2022 provided the launchpad.
Source: LSEG Refinitiv data. ChatGPT launch 30 November 2022
“When business is booming for the foundries and the memory makers, they look to build new multi-billion-dollar fabrication facilities (or fabs), so they can add capacity, make more product and fulfil demand. This spending goes straight to the semiconductor production equipment makers, of whom the Netherlands’ ASML and America’s Applied Materials are among the leading providers, along with LAM Research, KLA and others.
“Their share price progress has not been quite so spectacular, perhaps because visibility is lower and it takes longer for good news to filter through to the far end of the tech food chain, but they have done well nevertheless, and ASML’s fourth-quarter intake for 2025 demolished analysts’ expectations.
Source: LSEG Refinitiv data
“Again, November 2022’s launch of ChatGPT seems to put a bottom, and then a light, under their share prices.
Source: LSEG Refinitiv data. ChatGPT launch 30 November 2022
“The ChatGPT effect took time to have a positive effect upon the sales and profits of NVIDIA, Samsung, TSMC, SK Hynix, Micron, ASML and Applied Materials, but analysts clearly expect it to continue, judging by how consensus forecasts in aggregate for these firms pencil in increases of around 50% for sales and profits in 2026 and then a further increase in the top line of 22% in 2027, when operating income is expected to advance by another 40% or so, thanks to the benefit of operational gearing.
“The key now, though, is whether those estimates can be beaten, or not.”
Source: Company accounts, Marketscreener, consensus analysts' estimates for NVIDIA, TSMC, SK Hynix, Samsung Electronics, Micron, ASML and Applied Materials.
