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Chip Stocks' Two-Year Cycle: Panic or Prolonged Boom?
14 Nov
Summary
- Chip stocks follow a roughly two-year cycle of market tops.
- Recent drops in NVIDIA and AMD align with historical patterns.
- Contracted orders may extend the current semiconductor cycle.
Semiconductor stocks are exhibiting patterns reminiscent of a recurring two-year cycle, with market tops often occurring around 2020, 2022, 2024, and an expected 2026. Recent performance, including NVIDIA's 29% monthly decline and AMD's 12% drop, aligns with this historical script. This cyclical behavior is driven by industry overbuilding, where shortages lead to double-ordering, subsequent inventory pile-ups, and a pause in customer demand.
Despite these familiar signs of a late cycle, such as Micron's high gross margins and AMD's increased inventory, current conditions may differ. Over 75% of Micron's fiscal 2027 shipments are reportedly committed, and Broadcom forecasts significant AI revenue growth. AMD's CEO also noted demand exceeding supply, suggesting that strong contracted order books could extend the current semiconductor cycle beyond typical durations, making the future outlook complex.
Investors are advised to monitor key data points like memory pricing, inventory conversion rates for companies like AMD, semiconductor equipment demand from firms like Applied Materials, and TSMC's monthly sales figures. A sustained downturn in two or more of these indicators would confirm the cyclical top prediction. Conversely, if these metrics remain strong, the recent price drops may be mere valuation corrections within an ongoing expansion, indicating the cycle could continue longer than expected.
