Semiconductors are the lifeblood of our favorite devices.

From mobile phones to consumer electronics to cars, semiconductors are essential components to turn electric currents on and off.

Our internet doesn’t work without semiconductors. Heck, even that rice cooker in your kitchen won’t function without semiconductors.

These chips come in all sizes and are produced all over the world.

And while this was once a hot sector to invest in, the market has started to cool.

Today, I’ll look at the semiconductor sector’s performance in 2023 and examine its prospects in 2024.

With the help of Adam O’Dell’s proprietary Green Zone Power Ratings system, I’ll show you the industry’s health today.

Semiconductors Had a Lackluster 2023

Semiconductor stocks started last year off with a strong rally boosted by two words: artificial intelligence.

Private company OpenAI launched its AI-based ChatGPT later in 2022, and the world went bonkers.

AI’s grip on the public discussion pushed semiconductor stocks higher because semiconductors increase processing power which aids in the development of AI systems.

The SPDR S&P 500 Semiconductor ETF (NYSE: XSD) is an exchange-traded fund (ETF) that tracks the semiconductor market.

After hitting a low in October 2023, XSD jumped 37.5% to close out the calendar year up nearly 35% thanks to the hype surrounding AI and a more accommodative Federal Reserve.

As the AI hangover kicked in to start 2024, semiconductor stocks felt the pain to the tune of a 2% drop in the first three trading days of the year.

The big question for investors now is whether semiconductor stocks can reverse this funk and rekindle the momentum that pushed XSD close to a new high last year.

The Prospects for Semiconductor Stocks in 2024 Are Mixed

KPMG and the Global Semiconductor Alliance conduct an annual survey on the outlook of the industry.

Some interesting highlights from its 2024 edition:

  • While 83% of semiconductor executives said they project growing company revenues, only 40% expect that growth to be 10% or more.
  • One of the biggest headwinds for semiconductors is lower customer demand for new chips.
  • The Semiconductor Industry Confidence Index for 2024 was 54 — the lowest reading in five years.

This tells me the AI buzz that pushed semiconductor stocks up in the latter part of 2023 was short-lived, and pressure in the industry is mounting.

With that as a backdrop, I turned to Green Zone Power Ratings.

Something I find valuable when analyzing specific sectors is to run all of the holdings in the sector ETF and run them through Adam’s system.

This gives me two important pieces of information:

  1. A great overall picture of the health of leading stocks in the specific sector.
  2. Strong individual leaders and weak laggards within the fund.

I did that for XSD and came up with some interesting tidbits of analysis:

XSD Semiconductor ETF Rates “Bearish”

01_08_24 semiconductor stocks ETF rating

The average overall rating of the 38 stocks held in XSD was a “Bearish” 38. This tells me there is some broad weakness in the sector. A “Bearish” outlook on stocks means we expect them to underperform the broader market over the next 12 months.

There are some strong stocks in the mix — Universal Display Corp. (Nasdaq: OLED) is the highest-rated stock in the ETF with an overall rating of 75. Broadcom Inc. (Nasdaq: AVGO) is another strong performer with an overall rating of 70.

But investing in a basket of semiconductor stocks through a fund like XSD isn’t the way.

Now, that doesn’t mean the sector should be completely hands-off.

You just have to do some homework and use our Green Zone Power Ratings system to help lead the way.

Until next time…

Safe trading,

Matt Clark, CMSA®
Research Analyst, Money & Markets