Chip stocks have outperformed broader markets in 2019

Semiconductor stocks have been on a roll lately. YTD (year-to-date), the VanEck Vectors Semiconductor ETF (SMH) has risen 22% compared to the 17.1% YTD gain in the tech-heavy NASDAQ Composite Index (QQQ) and the 14.0% gain in the S&P 500 Index (SPY).

Xilinx (XLNX), Advanced Micro Devices (AMD), Micron (MU), and NVIDIA (NVDA) have all seen stellar gains this year, climbing 48.5%, 30.5%, 25.5%, and 26.4%, respectively.

Why Chip Stocks Have Outperformed Lately

The sector has surged, but risks remain

Stocks of chip makers saw heavy declines at the end of 2018, as the sector was at the center of the US-China trade war. Now that trade-related worries have eased to a certain extent, these stocks are beating the broader markets. The gains in the sector have come despite flat to negative earnings growth and worries of a slowdown in China.

China is an important market for the tech sector. NVIDIA, for example, gets ~20% of its revenue from China. Hence, slower growth in China and tariffs could be a double whammy for the sector.

If no trade agreement is reached between the United States and China, or the terms of the deal are unfavorable, chip stocks could fall again. Tariffs could also hurt the sector’s profits.

Last week, chip makers’ stocks surged on the back of strong earnings from Broadcom (AVGO), which rose 8.2% after reporting its earnings results and pulled the rest of the sector up along with it.

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