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Shares of the VanEck Semiconductor ETF (NASDAQ: SMH) rallied 32.2% in April, according to data from S&P Global Market Intelligence.
Like many non-energy sectors, the SMH fell toward the end of March, as the war in Iran appeared to escalate, before bouncing back in April after the U.S. and Iran agreed to a tentative ceasefire on April 8.
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However, the semiconductor sector got a much bigger bounce off the late-March bottom, thanks to several earnings reports from prominent chip giants. The positive numbers and commentary revalidated the strength of the AI build-out, sending the broader sector up strongly.
The earnings reports across several major semiconductor manufacturing companies and their equipment-maker suppliers coalesced around a positive story. The recent evolution of generative artificial intelligence into the agentic AI realm is providing tremendous benefits, and chipmaking demand well exceeds supply.
Taiwan Semiconductor Manufacturing (NYSE: TSM) is the world's largest semiconductor manufacturing company, and is thus seen as a bellwether for the industry. It also reports early in earnings season, publishing its first-quarter results on April 16. Despite high expectations, TSMC didn't disappoint, growing revenue by a whopping 40.6%, and net income by an even greater 58.3%.
Not only that, but the typically conservative TSMC management also said it sees growth above 30% this year, whereas last quarter it had guided to roughly 30%. TSMC also said its capital expenditures would be at the high end of its prior guidance of $52 billion to $56 billion, which was already an all-time high.
That set up very good earnings reports from two of TSMC's key equipment suppliers, ASML Holdings (NASDAQ: ASML) and Lam Research (NASDAQ: LRCX). Both companies also beat analyst expectations in the March quarter and provided similarly bullish commentary, not only for the rest of the year but also into 2027.
Strong reports from these key stocks and others lifted chip stocks across the spectrum, from chip designers to memory manufacturers to equipment providers of all types.
Things got even more bullish when Intel (NASDAQ: INTC) reported earnings on April 23 that surpassed analyst expectations by a wide margin. Intel had been the most prominent laggard in the AI race, but with the rise of agentic AI, demand for traditional data center central processing units (CPUs) is now skyrocketing. That new shift should be a huge boon for Intel's profitability.
Higher profitability could lead to a virtuous cycle for Intel, as greater financial strength could encourage outside chipmakers to begin using Intel's foundry and/or advanced packaging capabilities -- an effort Intel has pursued over the past few years. Given the reported capacity shortage throughout the chip industry today, many analysts that suspect Intel will, in fact, receive significant foundry orders from outside chip designers at some point this year.
As a result, Intel shares skyrocketed 114.1% in the month, vaulting the stock from outside the SMH's top 10 holdings to the fourth-highest weighting today.
Investors considering the SMH or individual semiconductor stocks today should realize that these stocks now trade at very high valuations, or at least higher valuations than they used to. However, this isn't some speculative bubble. Earnings across the sector are expected to rise at least over the next two years as AI data centers are built and utilized.
The big question is what happens to earnings after the next two years. Traditionally, semiconductors have been a cyclical sector. But the advent of generative AI is driving a multi-year growth boom, and it's unclear how long this boom will last.
This is to say that all long-term investors should have some exposure to the chip sector, given the long-term demand prospects for the chip sector amid the AI revolution. However, those looking to concentrate more heavily in the semiconductor sector should be wary of the risks. If a crack in the current outsize demand we are seeing happens, there could be a severe drawdown, given how far the sector has run over the past three years.
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Billy Duberstein and/or his clients have positions in ASML, Intel, Lam Research, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Intel, Lam Research, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Why the VanEck Semiconductor ETF Rallied Over 30% in April was originally published by The Motley Fool