Semiconductor stocks, already in rally mode, got a boost after the White House began releasing funding for chipmaking under the CHIPS and Science Act of 2022.
In the past five sessions, encompassing the time when the funding was announced, Broadcom Inc. NASDAQ: AVGO and ON Semiconductor Corp. NASDAQ: ON were among the top gainers in the Technology Select Sector SPDR Fund NYSEARCA: XLK.
In the first round of funding, BAE Systems plc OTCMKTS: BAESY will get $35 million to upgrade a New Hampshire factory that makes chips used in defense applications, including F-35 fighter jets.
The Commerce Department's choice of a defense supplier indicates the law’s focus on national security.
In a statement, President Joe Biden said “Today’s announcement is the first step of many to come.”
"Forefront of new technologies"
Over the coming year, he said, “the Department of Commerce will award billions more to make more semiconductors in America, invest in research and development capabilities to keep America at the forefront of new technologies, strengthen our national security, and create good-paying jobs.”
He also noted that over time, the U.S. went from producing nearly 40% of the world’s chips to just over 10%, “undermining America’s national security and making our economy vulnerable to global supply chain disruptions.”
The intention of CHIPs Act grants is to quadruple semiconductor production for national security applications, in particular. However, it also aims to boost chip capacity in general.
Chip stocks, like the broader market, also got a boost after the Federal Reserve said it expects interest rate cuts in 2024.
The iShares Semiconductor ETF NASDAQ: SOXX is up 9.55% in the past week. That’s outperforming other technology stocks in the S&P tech sector, which are up 3.06% in that time.
Chip index outperforming broad tech sector
Year-to-date, the SOXX ETF is up 64.22%, outpacing the XLK ETF, which is up 54.27% in 2023. Meanwhile, the SPDR S&P 500 ETF Trust NYSEARCA: SPY is up 24.81% this year.
Semiconductor stocks benefit from lower interest rates as they reduce borrowing costs for companies, supporting capital-intensive semiconductor manufacturing.
Additionally, lower rates drive consumer spending on electronics, increasing demand for semiconductors and boosting companies' revenue and profitability.
While the White House is using the BAE funding to signal its commitment to national security chips, AI will continue to be a driver of gains.
Analysts upgrade semiconductors
Advanced Micro Devices Inc. NASDAQ: AMD, Micron Technology Inc. NASDAQ: MU and Intel Corp. NASDAQ: INTC recently received analyst upgrades.
MarketBeat’s Advanced Micro Devices analyst forecasts show a Bank of America upgrade to “buy” from “neutral.”
Micron Technology analyst forecasts show upgrades from Bank of America, Stifel Nicolaus and UBS Group in the days since the federal funding was announced.
The Intel analyst forecasts show upgrades from Raymond James and Bank of America on December 15.
Generative AI will clearly be among the tailwinds likely to boost chip stocks in the coming months, Bank of America analyst Vivek Arya wrote in a research note.
Nvidia Corp. NASDAQ: NVDA has been the leader in that arena, but Intel and AMD are catching up fast.
Cloud computing and automotive additional drivers
In addition to spending on generative AI chips, enterprise customers are also increasing their outlays on cloud computing and automotive applications.
Meanwhile, J.P. Morgan analyst Harlan Sur said the opportunity for custom AI chips is growing at a faster clip than previously forecast.
Sur upgraded his market size forecast for custom-made application-specific integrated circuits, giving a range from $13 billion to $18 billion.
"We are at the cusp of a semiconductor up cycle (approximately four to six quarters of positive year-over-year growth) with industry revenue growth turning positive year over year in Q4 2023 and which we believe should persist through 2024 and into 2025," Sur wrote in a research note on December 11.
He wrote that Broadcom and Marvell Technology Inc. NASDAQ: MRVL “will be the biggest beneficiaries of this resurgence in custom chip design.”
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