The semiconductor industry has been a key driver of the market’s momentum since the COVID pandemic…
But in recent days, semiconductor stocks have been experiencing a sharp pullback…
The VanEck Semiconductor ETF (SMH), which includes industry giants like Nvidia (NVDA), Taiwan Semiconductor (TSM), and Broadcom (AVGO), has declined about 10% over the last week.
The selloff has sparked concerns among investors that the sector might be hitting a plateau.
But nothing could be further from the truth…
Today, we’ll examine what’s driving this short-term pullback in semiconductors… why this sector still has a ton of momentum pushing it higher over the long term… and how to get exposure to the upside.
How politics are driving the semi pullback
The main factor driving the pullback in semiconductor stocks is simple…
The 2024 presidential election.
You see, President Biden recently came out and said he may enact tighter trade restrictions on semiconductors with China.
Considering the massive size of this market, it makes sense that we’d see a knee-jerk reaction to the news across the semiconductor sector.
What’s more, former President Trump has suggested that if he’s elected president, he would consider reducing U.S. support for Taiwan—a critical player in the global chip industry—if China invades the country.
Put simply, the semiconductor sector’s recent underperformance has nothing to do with fundamental weakness… and everything to do with temporary political uncertainty as both presidential candidates go after voters.
But the knee-jerk reaction is completely overdone…
The bullish semiconductor trade is far from over
For one thing, policy changes, while impactful, are often less severe than initial market reactions fear.
More importantly, the AI boom is just getting started… and semiconductors are an integral part of the technology. Put simply, AI demand will drive growth in semiconductors for the foreseeable future.
We can see this in the numbers. Broadcom and Taiwan Semiconductor recently posted strong earnings… In fact, TSM reported a 30% year-over-year jump in net income, citing AI demand.
Now, we’re not saying the pullback in semiconductors is over… We’ll likely see more volatility across the space heading into the election as both candidates continue to make statements to rally voters.
But short-term volatility doesn’t negate long-term growth potential.
Put simply, the dip is creating an excellent buying opportunity for savvy investors willing to look beyond short-term noise…
Focus on industry leaders with strong financials and clear AI strategies. The top holdings in the VanEck Semiconductor ETF (SMH) are a good place to start. Holdings include winners like Nvidia, Taiwan Semiconductor, and Broadcom. These companies are well-positioned to weather short-term storms and capitalize on long-term trends.
The bottom line: The bull market in semiconductors is far from over… By focusing on high-quality market leaders with solid growth numbers, investors can position themselves to benefit from the continued upside.
Editor’s note:
Semiconductors aren’t the only way to play the AI mega-trend…
For instance, just this week, Frank recommended an AI software stock poised to grow earnings by 30% annually over the next few years.
Join Curzio AI for the full analysis… and a portfolio of stocks set to soar as AI goes mainstream.
