Why Have Semiconductor Stocks Had a Weak Quarter Despite Strong Earnings?

Semiconductor stocks were the story of the first half of 2026. The NYSE Semiconductor Index was up 114% through June 30. The index's top holdings include Nvidia, Micron, Advanced Micro Devices, Broadcom and Intel.

So far, the third quarter has been a very different story. As of September 3, the index was down 22% for the quarter. Despite that decline, it remains up 67% for the year.

Interestingly, the decline in the index has not been driven by weakness in the underlying earnings of the companies. In fact, the major semiconductor companies have generally reported very strong results.

All the companies listed above easily beat their quarterly earnings estimates. The beats ranged from approximately 3%, at Broadcom and Advanced Micro Devices, to 96% at Intel.

Guidance for the following quarter also generally exceeded expectations. Broadcom's guidance was in line with expectations, but the rest of the company’s provided guidance that was higher than estimates. Micron's guidance was approximately 22% above expectations, while Intel's guidance was approximately 41% higher.

The Market's Reaction to Strong Earnings

The blasé reaction to earnings really started with Micron, which reported late in the 2^nd quarter.

Micron provided guidance of $31 in non-GAAP earnings per share in the 4^th quarter, well above the $25 estimate. The company also provided $50 billion in revenue guidance, approximately 16% above estimates. The stock rose 16% the next day, but by July 1 it was trading below its pre-earnings price.

Nvidia also reported strong earnings and provided bullish long-term guidance. The company guided for 70% revenue growth through 2028, well above the 45% estimate. That bullish long-term guidance did send shares up 9% the following day, but the stock has largely been stuck in neutral since then.

Broadcom is the most recent company to report. The company beat expectations for the quarter and provided in-line guidance for the following quarter. Broadcom, which has historically provided conservative guidance, guided for a doubling of AI revenue from $58 billion in 2026 to $115 billion in fiscal 2027. That compares with estimates of approximately $100 billion. The company then expects AI revenue to double again to $230 billion in fiscal 2028, compared with estimates of approximately $180 billion. Based on current sales guidance from customers, these numbers are likely low. Despite the strong earnings and strong guidance, Broadcom's stock fell 3% following its earnings release.

Growing Skepticism Around AI Spending

The reaction to strong earnings and guidance is likely related to increasing skepticism around AI spending and its durability.

There is a reliance on the spending of a few companies. Most of Broadcom's pipeline is from Anthropic and OpenAI, which are private companies with financials that have yet to be disclosed.

Circular financing also continues, led by Nvidia. Nvidia is offering financing to customers to pull forward sales. Nvidia argues that these investments are necessary to support the future growth of AI, as its customers require unprecedented amounts of capital to build out AI infrastructure that may be difficult to obtain quickly enough through traditional debt and equity markets alone. The concern is one link could compromise the entire chain.

The amount of debt needed to fund the spending is huge. Hyperscalers are spending approximately $785 billion this year and $1 trillion next year. With interest rates rising, financing this spending is getting increasingly expensive. In addition to the higher cost, opposition to data construction is growing across communities, which could slow spending.

Lastly, there continues to be the ultimate question of what the return on investment (ROI) from the hyperscalers’ capital expenditures is. If the ROI fails to materialize as expected, perhaps from an over-capacity, spending will slow much more rapidly than the market expects.

Valuations Remain Important

The largest reason for the market's reaction is the elevated valuations of many companies. High valuations mean high expectations.

The good news is that since the earnings growth has been delivered, many valuations are now more in line with their long-term averages.

Broadcom trades at approximately 20 times next-twelve-month earnings, which is a reasonable multiple for a semiconductor and software company. Nvidia trades at approximately 18 times next-twelve-month earnings, its lowest valuation since 2019, before the AI boom.

Other companies, such as Intel, remain at much higher valuations. Intel's approximately 48 times next-twelve-month earnings multiple is still at a speculation-level valuation.

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