Volatile Chipmaker Stocks Emerge as Key Driver of S&P 500 Rally

Semiconductor Stocks Dominate S&P 500 Index, But Concerns Over Rally's Durability Grow

The S&P 500 Index experienced its biggest drop since March on Friday, falling 1.2%, while a gauge of chipmakers sank 4%. This selloff brought to the forefront concerns over the rally's durability, as the benchmark index has risen alongside chipmakers for most of 2026. The two have risen together, with a handful of semiconductor companies accounting for more than half of the 8% gain in the S&P 500 this year.

Nvidia Corp., Sandisk Corp., and Micron Technology Inc. have been among the winners, with Sandisk Corp. climbing almost 500% year-to-date and Micron Technology Inc.'s shares more than doubling. The rallies have been fueled by demand for chips to power the artificial intelligence industry, buoying the benchmark index in the face of a war in the Middle East and surging oil prices. Chip stocks now make up 18% of the S&P 500, a more than-two-decade high, which can exacerbate broader market selloffs if momentum shifts or chip demand cools.

The increased concentration of chip stocks in the S&P 500 has left the market more vulnerable to abrupt moves, according to Keith Lerner, chief investment officer at Truist Advisory Services. Even if the fundamentals are supporting the rally, things don't move in a straight line forever. So far, there are few signs that the spending driving the rally will slow anytime soon, with tech giants locked in a race to expand computing capacity.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The four biggest spenders - Amazon.com Inc., Microsoft Corp., Alphabet Inc., and Meta Platforms Inc. - are expected to plow nearly $700 billion into capital expenses this year. Capex will approach $5 trillion over the next five years, according to some estimates. Tech profits are booming, with earnings from semiconductor-related companies in the S&P 500 on track to jump 84% from a year ago in the first quarter.

For some individual companies, the projections are staggering: analysts see Micron, the biggest US maker of memory chips, growing earnings by 670% in 2026 to $65.8 billion. Many investors are also convinced that the proliferation of AI services throughout the economy will break the boom-bust cycle, as steadily rising demand for computing keeps chip sales on a steady footing.

However, semiconductor companies have been much more prone to business cycle swings than tech giants like Alphabet and Apple Inc., which have sprawling operations and dominant positions across industries. Boom times for chipmakers have typically been followed by slumps when demand slows, pricing power gets eroded and earnings drop. Such episodes are difficult for investors to time - and have often been accompanied by brutal selloffs.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Some investors, such as Michael Burry, have warned about the market's vulnerability to a selloff. Jonathan Krinsky, chief market technician at BTIG, expects the semiconductor index to fall more than 20% from current levels after its "parabolic" rise. Even bulls are well aware of the sector's extremely cyclical nature, but many, such as Neuberger's Blazek, are convinced the rally has a way to go.

"Hyperscalers have been raising their capex pretty consistently, and one day that will stabilize or reverse," he said. "That's when we could see a pretty big correction in the chip space."