U.S. economic resilience could add luster to semiconductor shares
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[February 25, 2023] By
Lewis Krauskopf
NEW YORK (Reuters) - Signs of a resilient U.S. economy are boosting the
appeal of semiconductor stocks, even as worries over the Federal
Reserve's monetary policy tightening weigh on the sector along with the
broader market.
The Philadelphia SE Semiconductor index is up about 16% so far this
year, dwarfing the 3% year-to-date gain for the S&P 500 and the Nasdaq
Composite’s 8.5% rise.
Semiconductors were among the worst hit areas in last year’s market
rout, which saw the SOX index lose 36%, fueled by worries of an imminent
recession. They have been standouts in the market’s 2023 rebound,
supported in part by evidence that the U.S. economy continues to be
robust even after the Federal Reserve unleashed its most aggressive
monetary policy tightening in decades to fight inflation.
With semiconductors a key component in countless products, some
investors are betting economic strength could help the shares
outperform.
Despite last year’s recession fears, the market now believes "the
economy is going to continue to chug along," said King Lip, chief
strategist at Baker Avenue Wealth Management, whose firm owns shares of
Nvidia and On Semiconductor. "If that’s the case, then I think
semiconductors can do very well.”
Of course, economic strength has been a double-edged sword for stocks
lately. Semiconductor shares have pulled back recently along with
broader markets on worries of a "no landing" economic scenario in which
strong growth keeps inflation elevated and prompts the Fed to raise
interest rates higher for longer. More insight into the state of the
economy comes next week with a raft of data due, including consumer
confidence and durable goods.
Still, virtually all of the 30-component Philadelphia semis index have
outperformed the broader market this year, led by heavyweight Nvidia's
roughly 60% year-to-date gain.
The chip designer's shares rose 14% on Thursday after it forecast
first-quarter revenue above estimates as its CEO said use of its chips
to power artificial intelligence services had "gone through the roof in
the last 60 days."
The rally in Nvidia’s shares has catapulted its market value to $570
billion, making it the sixth most valuable S&P 500 company after
electric automaker Tesla.
Whether the group maintains its momentum could depend on companies
hitting earnings estimates that were marked down severely in the last
year.
Forward 12-month earnings estimates for semiconductor companies declined
28% from June of last year to January, the largest such downward
revision in a decade, according to Stacy Rasgon, an analyst at
Bernstein.
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Traders work on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S., February 17,
2023. REUTERS/Brendan McDermid
“We have had one of the larger earnings resets that we have had in a
quite a while," Rasgon said.
Earnings for the S&P 500 semiconductor and semiconductor equipment
industry, which has a nearly 6% weight in the index, are expected to
fall 20% this year, but are seen perking up in the last quarter of
the year, according to Refinitiv IBES.
"It’s not that fundamentals are incredibly good right now," said
Peter Tuz, president of Chase Investment Counsel. But, he said, "the
outlook down the road seems to be a little bit better than it was in
late 2022.”
Not every chip stock has thrived. Intel shares have slumped 5% this
year. The company earlier this week cut its dividend payout to its
lowest in 16 years amid slowing demand for its chips used in
personal computers and data centers.
While chip stocks might benefit from a stronger economy, few expect
them to be immune to the adverse effects of higher Treasury yields,
which have surged along with Fed rate expectations. Rising yields
offer investment competition to stocks and make equities more
expensive in standard analyst valuation models - particularly for
tech companies, whose market value is more dependent on future
profits.
And if tighter Fed policy eventually brings on a recession in the
second half of the year, as some fear, semis could suffer.
Burns McKinney, a portfolio manager at NFJ Investments, also sees
declining demand in the personal computer market after the pandemic
boom as yet another obstacle for the sector.
Nevertheless, he believes the sector could thrive in the
longer-term, especially if signs of cooling inflation eventually
allow the Fed to slow its monetary policy tightening later in the
year. McKinney holds positions in Texas Instruments and ASML
Holding.
“Lower data prints should give the Fed the ability to take their
foot off the brakes, and if that takes place it would be a positive
for cyclical tech stocks,” McKinney said.
(Reporting by Lewis Krauskopf; additional reporting by David Randall
in New York and Noel Randewich in San Francisco; Editing by Ira
Iosebashvili and Deepa Babington)
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