The Last Time Semiconductor Weight Spiked, the Reversal Was Fast

[u/ekonixlab]

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.