Chipmakers are outshining Big Tech in the AI rally

New York (CNN) — Big Tech, once the market leader, is being overshadowed by gains from the new stars of the artificial intelligence boom: semiconductor chipmakers.

Nvidia shares (NVDA) climbed almost 9% Thursday after strong earnings in which the chipmaker not only doubled its sales from a year ago, but also reassured investors with forecasts for continued blockbuster growth. That sent some other chipmaker stocks – and the whole market – higher. The tech-heavy Nasdaq rose 1.57% and the S&P 500 rose 0.72%.

Shares in semiconductor companies such as Intel (INTC) continue to surge, benefitting from their role in the supply chain for the AI buildout. However, Big Tech stocks like Meta (META) have dropped in the last year as the company pours billions of dollars into building AI infrastructure.

The S&P 500 is up 13% this year, adding roughly $7.6 trillion in market value. Chip stocks have accounted for 37% of those market value gains, according to Mike O’Rourke, chief market strategist at JonesTrading.

The semiconductor industry accounts for nearly a third of the S&P 500’s market value, according to Stifel, an investment bank. Chip and tech hardware stocks account for nearly 45% of the Nasdaq 100’s.

But the market’s reliance on chip stocks presents its own risks.

“If the new market leaders, semiconductor firms, also start to struggle, the stock market would be in big trouble,” James Reilly, senior markets economist at Capital Economics, said in a note.

Chip champions

The companies making the “picks and shovels” of for AI infrastructure – the hardware, products and services to build data centers – are reaping the benefits of the investment boom.

Chipmaker Micron Technology (MU) is up 220% this year, and in May surpassed $1 trillion in market value. Marvell Technology (MRVL), another chipmaker, is up 185% this year. Intel is up 150%. In South Korea, SK Hynix and Samsung have catapulted the benchmark Kospi index to gains of more than 60% this year.

The rally in chip stocks was so strong earlier this year that it put them at the heart of bouts of market volatility in recent months. But overall gains remain strong for the year, and chip stocks continue to outperform Big Tech stocks.

Meanwhile, Big Tech stocks continue to waver. It’s been 10 months since Microsoft (MSFT) shares hit a record high, and the stock is up just 4% this year.

Alphabet (GOOG) and Amazon (AMZN) shares are up about 8% and 11% this year. And both stocks are down about 15% and 10%, respectively, from peaks in recent months.

Apple (AAPL) is up about 16% this year, but is still trailing far behind shares of chipmakers. Even Nvidia – a chipmaker itself – is up just 22% this year, posting modest gains compared to other chipmakers that are outshining Big Tech.

A popular exchange-traded fund tracking semiconductor chip stocks is up 70% this year. Meanwhile, an ETF tracking the so-called Magnificent Seven – a group of Big Tech stocks including Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla – is up just 4% this year.

Concentrated gains

While chipmakers have been clear winners, investors continue to raise their expectations for companies’ earnings. The higher the bar is raised, the less patience there is for disappointment.

AI trades like semiconductor chips are echoing the mania of the late 1990s, Thomas Carroll, an equity market strategist at Stifel, wrote in a note. And while Carroll said he’s staying long on these stocks, he has his “eyes wide open” about a potential shift in sentiment – specifically if Big Tech’s spending on AI shows signs of slowing, which could hit chipmakers’ future profits.

Investors have gotten a glimpse of what nerves about chip stocks can do the market. When Broadcom, a semiconductor giant, reported earnings in early June, its forecasts for chip revenue in the third quarter slightly missed expectations. Investors sent its shares down almost 20% across the next two days as a result.

“We have seen other cracks over the past year… and they have not upset the apple cart for very long. So, it would be foolish to try to say that the AI bubble is about to burst,” Matt Maley, chief market strategist at Miller Tabak + Co, said in a note.

“However, it is still important to point out that these cracks have indeed appeared… and thus investors will want to keep a close eye on how these developments proceed going forward,” Maley said.

CNN’s Ramishah Maruf contributed to this report.

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