The index of semiconductor devices has soared this year. Analysts warn that the highest levelof of semiconductor equipment looks more like a frenzy, much like the dotcom bubble era.
Semiconductor Equipment Index Soars
As of November 6, the index of semiconductor equipment had surged nearly 51.89 per cent, more than double the 22.73 per cent gain in the year to the beginning of the year. The Philadelphia Semiconductor Index is up 48.52 percent so far this year, well above the S.P. 500’s gain and hitting an all-time high of 1,742.96 in November.
But in the face of the semiconductor industry, analysts at BCA Research warn that the highest levelof of semiconductor equipment looks more like a frenzy than in the dotcom bubble era.
During the dotcom bubble of the 1990s, investors eager to buy internet and high-growth companies pushed up valuations a lot. From its low slot in October 1998 to its peak in March 2000, the Nasdaq (8434.5161, 23.89, 0.28%) composite index surged nearly 280 percent. But once the bubble burst in 2000, the index fell 79 per cent in 18 months.
Analysts believe the industry’s relative forward profits lag far behind relative share prices and face both external and domestic demand challenges in the future. Externally, the semiconductor equipment industry has 90 per cent of its exposure to overseas sales, while global semiconductor demand is likely to decline in the future. Demand for semiconductors will fall by 13.3 per cent in 2019 and “return to growth” in 2020, according to world semiconductor statistics.
In terms of domestic demand, analysts point out that U.S. manufacturing is still shrinking. The U.S. ISM manufacturing PMI stood below 50 percent for the fourth consecutive month, up from 48.8 percent in October. This, they say, suggests that the semiconductor industry’s high valuations are “baseless and bound to return to reality”. “While the bulls will take advantage of the buying, we insist on shorting.” “
How far are tech stocks from the dotcom bubble?
Despite the intensification of external risk factors, the Fed’s rate-cutting cycle has given the market a dose of “doping” and U.S. stocks are performing away from their earnings. And with the Federal Reserve pulling out of interest rate cuts, U.S. stocks are expected to return to fundamentals.
So far this year, the Standard and Poor’s 500 index has risen more than 20 per cent, but is expected to grow only 1 per cent in annual earnings. Matt Maley, equity strategist at Miller Tabak, says he has never seen such a big mismatch between stock market performance and corporate earnings in more than two decades. U.S. stocks had similar but smaller divisions in 2012, and today’s big mismatch estheday can be compared to 1997.
Quint Tatro, president of Joule Financial, thinks monetary policy may be enough to support the rally, despite poor earnings. Tatero noted that the gains in U.S. stocks were linked to the Fed’s easing policy, and that investors could not match the Fed.
However, this investment logic is shifting as global risk factors dissipate. In the minutes of its October meeting, the Fed removed the key provision of “take appropriate action to sustain economic expansion”, implying the end of the rate cut cycle. Without further easing, U.S. stock valuations may return to a reasonable range.
And if the U.S. stocks into the valuation adjustment, the first of which is the early rise of the stronger sector, technology stocks face risks. Mark Newton, founder and president of Newton Advisors, says that by the end of the year, industries that beat the market and those that are lagging behind often experience valuation returns. Technology stocks, which led the market in the early stages, are particularly at risk.
He further pointed out that u.S. stocks will see some profit-taking in November or late December, and that it will not be a good time to invest in technology stocks between now and early next year.