US chip stocks tumble after strongest year since 2009

US chip stocks added to a string of losses on Wednesday, with Wall Street’s main semiconductor benchmark tumbling from record highs following its strongest year since 2009, when the sector bounced back after the financial crisis.

Drops of over 2 per cent in Advanced Micro Devices (AMD.O), Qualcomm (QCOM.O) and Broadcom (AVGO.O) weighed most on the PHLX semiconductor index (.SOX), which was down 2.1 per cent.

The chip index has now declined almost 7 per cent since reaching a record high close on Dec. 27.

This week’s drop in semiconductor stocks has tracked a broad Wall Street decline as investors await the Federal Reserve’s December meeting minutes due later on Wednesday for clues on its interest rate path.

Fueled by optimism about artificial intelligence and more recently by expectations the Fed will cut interest rates this year, the PHLX surged 65 per cent in 2023, its strongest performance since 2009. That compares to annual gains of 43 per cent and 24 per cent, respectively, for the Nasdaq (.IXIC) and S&P 500 (.SPX).

Chip stocks have also benefited from bets that a downturn in global demand last year that saw memory chip makers cut production has largely bottomed out.

Nvidia (NVDA.O), viewed as the top provider of AI-related chips, saw its stock market value more than triple in 2023 to $1.2 trillion, making it Wall Street’s fifth most valuable company. It dipped almost 1 per cent on Wednesday.

In a client note, BofA Global Research analyst Vivek Arya recommended exposure to cloud computing and cars through stocks including Nvidia, Marvell Technology (MRVL.O), NXP Semiconductors (NXPI.O) and ON Semiconductor(ON.O). Arya also recommended stocks including KLA Corp (KLAC.O) and Arm Holdings (O9Ty.F), for exposure to the increasing complexity of chip designs.

In another note, Wells Fargo analyst Joe Quatrochi said he expects a muted recovery for chip equipment sellers in 2024, and pointed to KLA and Applied Materials (AMAT.O) as top picks in that industry.