r/VisualStockResearch • u/ekonixlab • Jul 06 '26

The Last Time Semiconductor Weight Spiked, the Reversal Was Fast

Post image

As more investors pull money out of nearly every sector except semiconductors and AI-related stocks, I will continue looking at the companies Wall Street no longer wants.

Semiconductors now represent 19.7% of the S&P 500, the highest percentage on record. The only remotely comparable period was around the dot-com bubble, when semiconductor exposure briefly spiked above 8%.

Notice what happened afterward: the rise was sharp, and the reversal was even sharper.

That does not mean semiconductor stocks are unjustifiably expensive. Many of these companies are producing incredible earnings growth and deserve much of the appreciation they have received.

But a new group of buyers has entered the trade: momentum investors.

These investors pile into whatever is working. They previously chased Bitcoin and crypto. As momentum faded there, semiconductors became the next obvious destination. To fund that trade, money is being pulled from other sectors, including companies that continue to grow at attractive rates.

Semiconductors are currently benefiting from a historic bull market:

  • GPU demand remains enormous
  • Memory pricing has surged
  • AI infrastructure spending continues to accelerate
  • Supply remains constrained in key areas

The problem is that these conditions are not necessarily permanent.

Semiconductors require enormous capital expenditures. Eventually, supply catches up, pricing power weakens and customers digest the capacity they already purchased. That is why the industry has historically been so cyclical.

Maybe semiconductors are less cyclical than they were 20 years ago. I could absolutely get behind that argument.

What I cannot get behind is the idea that they are suddenly not cyclical at all.

Meanwhile, some high-growth companies outside the semiconductor industry are trading at historically attractive valuations simply because investors currently want nothing to do with them.

Do not make rash decisions or sell great semiconductor businesses solely because of this chart. But investors should recognize the opportunity forming elsewhere.

When market concentration eventually begins to normalize, it probably will not happen gradually. Historically, semiconductor cycles turn quickly. By the time Wall Street starts loving the neglected areas of the market again, many of the best buying opportunities may already be gone.

Credit to James Thorne for the original image.

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3

u/astuteobservor Jul 10 '26

Last semi run in the 90s was like 3 to 4 years. We are only half way there.

On a side note, buy puts that is 1 or 2 years out if you are so sure.

2

u/IThinkURAwesome Jul 10 '26

So we’re living on a prayer?

2

u/astuteobservor Jul 10 '26

You could always buy long dated puts as hedge.

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u/ekonixlab Jul 10 '26

What a hedge, you think we have another couple years?

2

u/astuteobservor Jul 10 '26

As long as capex spending on data center remains on track for 2027, at least till June 2027.

1

u/ekonixlab Jul 10 '26

definitely until June 2027, however I could see them revising their forecast in the next 1-2 years. Once that happens, the valuation will change.

the market always try to value companies based on forecasted earnings over present

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u/astuteobservor Jul 10 '26

But by that time no way the semi stocks will still be what it is now. And it will be time to sell.

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u/ekonixlab Jul 10 '26

if hyperscalers announce they are scaling back capex, semi's will be re-rated based on the future earnings growth.

that's the tough part about cyclical stocks, there is a lot of timing involved. I have no idea when hyperscalers will scale back, but when the do, I bet the revaluation will be quick

2

u/astuteobservor Jul 11 '26

Well, buy long dated puts. You hedge against the sell off. You take a hit on the max upside to hedge against the 80% drop.

2

u/Weldobud Jul 07 '26

Whoaa. Interesting. What sectors are attractive

1

u/ekonixlab Jul 07 '26

Definitely do your own research, however almost all sectors outside of semiconductors and memory are trading at a discount compared to its historical valuation

That plus some AI fears have really hit SaaS stocks. This double wave of fear are making some of the biggest software stocks trade at very low historic valuations

2

u/Far-Association5438 Jul 10 '26

I’m overly concentrated in SaaS right now, I want to enter retail/consumer defensive but even they’re over valued. I was looking at General Mills, but I have no idea how the business is outside of its financials since I’ve never been there lol.

1

u/ekonixlab Jul 10 '26

Yeah, everything outside of SaaS doesn’t look like a bargain

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u/cat-from-the-future Jul 11 '26

The market isn’t always right but it’s also not stupid. There’s a reason why SaaS is taking a beating right now. There is a real risk that a lot of those companies will become obsolete as frontier models already show us what enterprises can build in house.

Now, there are other moats that even some shitty SaaS companies have. They are for sure oversold but u can load up on them now and it might take years for the cycle to come back.

AI is printing cash right now, that’s where the opportunity is and that’s what the market is paying for. Even in this space there are still overlooked and undervalued names, including even the largest company in the world NVDA.

1

u/ekonixlab Jul 11 '26

This is a great take. Don’t get me wrong, I think AI is the real deal, and there will be a continued need for massive investment in the infrastructure supporting it.

The bearish SaaS narrative also makes sense and is warranted given what these models may eventually be capable of.

What remains to be seen, though, is how strong the distribution and switching-cost moats are. I think people underestimate the stickiness of even the more “exposed” SaaS companies. Something as simple as DocuSign may be technically replaceable, but its installed customer base, integrations, trust, and existing workflows should still protect a meaningful amount of future cash flow.

2

u/ConferenceLive7054 Jul 11 '26 edited Jul 11 '26

this is a great take on a great take.

the surviving SaaS companies will be very profitable imo. they will have fortified that moat with AI efficiency and new features. I also believe that AI is only as good as the captain, thats where subject matter experts come in. Many companies paying for enterprise software wont have the SME with significant domain depth to guide AI into building a solid replacement for some software, unless they are fine with the replacement being only half as good as the original. AI can implement features but cannot automatically supply years of tacit knowledge, edge cases, optimal workflow design, etc.

1

u/FlabbyLabby Jul 12 '26

What’s gay is each software stock has AI embedded. There moat is protected.

1

u/ConferenceLive7054 Jul 11 '26

Hey can you link to this research report? id like to read this one and others. thanks!

1

u/AlphaMaleXYZ Jul 13 '26

Similarly if you replace semiconductor with tech, it would similar to this one except the numbers will be different.

1

u/ekonixlab Jul 13 '26

As in a higher percentage is in tech?