Why it's time to start discussing semiconductors like commodities: There may be a supercycle

Ned Davis Research strategists Pat Tschosik and Philippe Mouls propose that semiconductors could enter a prolonged 'supercycle,' comparing their role to essential infrastructure like railroads and utilities. They argue computing power is now deeply embedded in the economy, with demand shifting from PCs and smartphones to AI, robotics, defense, and automotive sectors. Supply constraints—due to capital-intensive foundry development—could sustain growth, while hyperscalers' increased spending may reduce boom-bust cycle risks. However, the analysts acknowledge bubble risks, including potential normalization of hyperscaler capital expenditure, uncertain AI profitability, and slower-than-expected adoption. They note that demand for chips remains cyclical, tied to economic fluctuations in sectors like PCs, smartphones, and autos. A 45% rally in the S&P 500 Semis & Semi Equipment grouping in 30 days mirrors past bubbles (1998, 2001, 2002), with the 1998 case—where the bubble burst two years later—seen as most relevant. To spot a peak, Ned Davis highlights warning signs: a high percentage of companies fitting a 'bubble definition,' slowing capex guidance from hyperscalers, and weakening memory stocks like Micron, SK Hynix, and Samsung. The most alarming signal is when exceptional earnings trigger negative stock reactions, as seen in past tech bubbles. Despite fundamentals appearing strong even after price peaks—such as semiconductor billings growth peaking six months after the 2000 dot-com crash—they stress the challenge of identifying the market's turning point. The debate over a supercycle versus a bubble hinges on whether AI-driven demand will sustain long-term growth or follow a cyclical pattern. Ned Davis concedes that overbuilding may feel inevitable, drawing parallels to the late 1990s internet expansion. Investors must weigh whether semiconductors are entering a new era of structural demand or repeating historical boom-bust cycles, with key metrics like capex trends and stock reactions serving as critical guides.