Semiconductors are outpacing everything in the stock market, including the hyperscalers that drove returns from 2022 to 2025. The S&P Semiconductors Select Industry Index has soared 144% in the past year, far exceeding the S&P 500's 19% gain and the hyperscaler basket's 36% advance.
Driven by insatiable AI demand and structural supply constraints, the sector is on pace for 83% earnings growth. However, history warns that ultra-juicy semiconductor margins-currently at 44%-tend to attract new capacity, leading to oversupply.
Goldman Sachs' Jim Covello suggests hyperscalers like Microsoft, Oracle, and Meta Platforms offer a better AI play now. If these companies generate returns on AI investments, they could outperform chip stocks. Conversely, spending cuts would hurt semiconductor demand.
The rally may pause or reverse as second and third-tier chipmakers surge. While demand appears strong, betting against human ingenuity to meet supply is risky.