By Jacob Sonenshine

Chip stocks have had plenty of juice for their gains, but there's only so much juice to go around.

The VanEck Semiconductor exchange-traded fund owns companies that are seeing explosive demand for the artificial-intelligence chips that go into companies' ever-growing data centers. They include Nvidia, Advanced Micro Devices, Broadcom, memory-chip makers Micron Technology and Western Digital, Taiwan Semiconductor, which makes the basic components for much of the industry, and semiconductor equipment manufacturers. The ETF is near a record high, up nearly twofold from the low of a brief decline in late November.

Underpinning the advance: higher sales and profit estimates. Most companies in the fund have seen analysts lift their 2026 earnings expectations, according to FactSet.

Analysts have revised higher their 2026 sales estimates, in aggregate, for companies in the fund by 13% since the end of November. The Big Tech internet and software companies have continued to ratchet their capital investments higher (think larger chip purchases). That means larger profit margins and more share repurchases, bringing analysts' earnings-per-share forecasts up 46%.

The result is that valuations have expanded. Analysts and the market now expect far higher earnings growth this year and next year, which is why the fund's forward price/earnings multiple is up to just over 31 times, right around its peak for the past year.

That's one indicator that the stocks can't continue to gain as much as they have lately. Right now, software companies are scrambling to meet customer demand by ramping up compute and data-center capacity, so this is a fun moment for the semiconductor industry. But the market has in the back of its collective mind that, at some point, companies will slow the growth of their spending on chips. When is difficult to say, but the market seems unwilling to bid these stocks up much higher than current multiples.

Relatedly, earnings revisions can't keep increasing at their recent rates. The percentage of S&P 500 semiconductor companies that have seen this year's earnings revisions move higher recently neared 80%, according to Morgan Stanley strategists. That's just about the largest percentage seen since at least 2003, and whenever that metric nears 80%, analysts begin to reduce estimates for more companies. That spells potential pressure in the near term for a bunch of chip stocks, which could easily keep the fund's gains at bay.

In fact, volatility in these names has already picked up, which can often act as a warning sign for these stocks. Since June 4, the chip fund has gained or lost at least 1% each day.

Meanwhile, the tech-focused Cboe Nasdaq Volatility Index has risen so much that the difference between its current level and the S&P 500-focused Cboe Volatility Index is near the widest since late 2020, according to Evercore strategists. When tech volatility has been so relatively high in the recent past, tech and chip stocks were not far from tumbling.

In late 2020, after the Cboe Nasdaq Volatility Index had seen a similar spike, the chip fund dropped as much as 11% from early to late September. The drop in 2022 -- after a 2021 volatility spike -- was worse.

The point is that these stocks are in for stops and starts that will likely slow gains. They'll probably still rise over the next year or two simply because, over periods of quarters, the next-twelve-months outlook will call for higher earnings. These companies are still seeing high growth. But along the way, market participants will remain fickle about when to buy and what valuations these companies should fetch. This will cause bouts of declines, which will curb just how high these stocks go.

So what should stock investors do? Don't buy more chip stocks. Hold them in case they continue to outperform the major indexes, but if you've got extra cash to invest, look for safer AI plays or even stocks in non-AI sectors with their own earnings growth drivers.

Don't expect a straightforward market. Invest accordingly.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 17, 2026 12:24 ET (16:24 GMT)

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