Semiconductor Stocks Soar To All-Time Highs: On Track For Strongest Year Since 2008, But Are They Too Expensive Now?

In 2023, the semiconductor industry has emerged as the standout performer, with the PHLX Semiconductor Sector, tracked by the iShares Semiconductor ETF (NYSE:SOXX), achieving a remarkable 66% increase and reaching new all-time highs.

This growth not only signifies the strongest performance among U.S. equity industries but also marks the sector’s best showing since 2008.

However, the soaring valuations prompt a critical question: Are these heightened prices sustainable, or is the market leaning too heavily on future expectations?

A Year Of Records For Semiconductor Stocks

Chipmakers have literally dominated in terms of performance, consistently maintaining the top spot throughout the year among the top-performing industries in year-to-date returns.

If you had invested $1,000 in semiconductor stocks at the beginning of 2023, your investment would have grown to $1,653 by Dec. 26, 2023. This growth surpasses the investment’s increase to $1,443 seen in the Nasdaq 100 Index and the rise to $1,243 in the S&P 500 during the same period.

The VanEck Semiconductor ETF (NYSE:SMH), which differs from SOXX due to its higher weight on Nvidia Corp. (NASDAQ:NVDA), has witnessed a 74% rise year to date. Nvidia, the top performer in the S&P 500 for 2023, has experienced a 240% gain.

Excluding Nvidia, six other chipmakers rank in the top 25 performers of the S&P 500 this year:

Advanced Micro Devices Inc. (NASDAQ:AMD) – up 119%
Broadcom Inc. (NASDAQ:AVGO) – up 101.4%
Lam Research Corp. (NASDAQ:LRCX) – up 89%
Intel Corp. (NASDAQ:INTC) – up 89%
Monolithic Power Systems, Inc. (NASDAQ:MPWR) – up 79%
Micron Technology, Inc. (NASDAQ:MU) – up 75%

Read also: Nvidia Stock Near All-Time High Yet Indicators Are Mixed — All Eyes On 2024

Are Semiconductors Becoming Too Expensive?

From a technical standpoint, the SOXX ETF is currently overbought, as indicated by the Relative Strength Index (RSI) on both the daily and weekly timeframes. This may indicate that the power of the recent trend has been rather strong, opening up opportunities for a near-term pullback due to profit-taking.

From a purely fundamental perspective, the 25 semiconductor stocks included in the SOXX ETF trade at an average price equal to 28 times their expected 1-year earnings. This is almost twice as expensive as their…