Wall Street zeroes in on semiconductors after turbulent week

US semiconductor companies will get a closer look from investors in coming weeks, after diverging reports from two industry leaders abroad set off a volatile few days of trading.

Because semiconductors are key components in a broad array of products, chipmakers and related equipment companies are closely followed for insight into the economy. Wall Street also watches the stocks as indicators of overall market trends.

This year, the industry has been at the center of the artificial intelligence enthusiasm powering the stock market to record highs, highlighted by massive gains for Nvidia NVDA.O, the AI poster child.

"It's vitally important that these chip stocks hold up," said Matt Maley, chief market strategist at Miller Tabak. "If they go down, it weighs on the rest of the market."

The Philadelphia SE Semiconductor index has pulled back after climbing more than 40 per cent in the first half of the year. It is now up about 25 per cent in 2024 against a 22.5 per cent gain for the benchmark S&P 500 .SPX.

Semiconductor and related equipment stocks account for 11.5 per cent of the weight of the S&P 500. Nvidia, which is approaching Apple as the largest company by market value, holds a 6.8 per cent weight in the index.

The sector had its share of drama in the past week. Chip shares tumbled on Tuesday after equipment maker ASML, Europe's biggest tech firm, projected lower-than-expected 2025 sales and bookings. But the group rebounded on Thursday after Taiwan Semiconductor Manufacturing Co 2330.TW, which produces advanced chips used in AI applications, reported a forecast-beating 54 per cent jump in quarterly profit.

Following the dueling announcements, the SOX semiconductor index is down 2.5 per cent so far this week, with the S&P 500 up 0.5 per cent.

The semiconductor group could take its next cues from imminent corporate reports, including from Texas Instruments and equipment company Lam Research next week.

Texas Instruments' products are used in a broad range of applications, including automotive and industrial, and could be a barometer for whether such areas that have been sluggish for the chip industry are starting to rebound, said Daniel Morgan, portfolio manager at Synovus Trust.

Overall, Morgan said, the semiconductor group is trading at 5.6 times price-to-book valuation, which he said was fair, noting that group topped 8 times price-to-book levels in 2021.

Advanced Micro Devices' AMD.Oearnings report the following week will give some initial insight into AI-related demand ahead of Nvidia's highly anticipated report due late next month.

If AMD's 2025 forecast for its AI chips is strong, "that's going to be bullish for the sector," Maley said.

The semiconductor reports are due in a busy week for US corporate earnings overall, with well over 100 S&P 500 companies set to report, including Tesla , Coca-Cola KO.N and IBM.

"The (semiconductor) group is very important, if nothing else because of the market cap that it carries," said Chuck Carlson, chief executive officer at Horizon Investment Services.