Chip Stocks Are Bouncing Back. Believe in Them. -- Barrons.com

By Jacob Sonenshine

Chip stocks are on the mend Monday after an awful Friday. There's plenty of potential for more gains.

The VanEck Semiconductor Exchange-Traded Fund, home to Nvidia and the handful of other companies that make chips for data centers and other purposes, is up just over 5% Monday. Market participants are buying Friday's dip, which saw the ETF drop 9%, its worst daily decline since January 2025, according to Dow Jones market data.

Buyers have plenty of reason to believe in this group for the rest of the year and beyond.

Remember, much of this year's chip rally is rooted in strengthening fundamentals. Analysts have lifted earnings expectations for companies in the ETF in aggregate, and boosted their 2027 earnings per share estimates by 38% from the close of 2025 to date, according to FactSet.

The main driver is that the major internet and software companies have increased their outlooks for capital expenditures faster than most had anticipated, forcing analysts to bump next year's sales estimates for companies in the ETF by 24%. The result is that profit margin estimates have crept higher, all culminating in the explosion of earnings projections.

The key: neither the chip companies nor their data center customers have given any indication of a slowdown in spending growth. Microsoft, for example, said on its April earnings call that it's "aggressively" adding compute capacity -- through data center investments -- because customers' AI demand still exceeds its capacity.

Analysts expect $148 billion of capex from Microsoft in calendar year 2026, with 24% growth next year. They've even lifted their capex estimates a touch for both years since the call.

Consistent with that, chip maker Broadcom beat sales and earnings estimates last week -- and guided for third quarter total revenue that was 4% above analysts expectations prior to the earnings release. Semiconductor solutions revenue in the reported quarter grew 79% year over year.

This week will bring another gut check for data center and chip demand, but a disappointing outlook on that front appears unlikely. Oracle will report quarter earnings Wednesday, and chip investors will focus on the software giant's capex plans. Analysts expect Oracle's capex for the quarter to grow 30% to $11.8 billion.

Overall, "we expect [Oracle's] capex will rise materially in fiscal year 2027," writes Deutsche Bank's Brad Zelnick, who sees upside to the company's capex plans versus current consensus forecasts.

At the least, Oracle is unlikely to drastically reduce the spending outlook. The consensus third quarter capex estimate is about 62% of expected sales in the period. If Oracle beats sales expectations, which it did last quarter, the capex would look even lower as a percentage of revenue -- and the company guided last quarter to fiscal year 2026 capex that would land at about 74% of sales. So right now, Oracle looks ready to provide either a status quo update to ongoing capex growth or a larger number.

That would be music to the ears of long-term chip investors. "While obviously semis have run up substantially, we believe that this will be an elongated cycle and many areas are just getting started," says Christopher Shaffer, managing director at Talaria Capital Advisors.

That's why the growth outlook is so strong. Analysts are looking for 34% 2027 earnings per share growth for the chip fund, in aggregate, to $24.71.

That number, as long as the fund meets or beats it, leaves plenty of juice for more gains throughout this year. The chip fund trades at 30 times next 12 months earnings estimates.

Yes, that's well above the S&P 500's roughly 21 times, but the peak multiple during the AI era, which began in late 2022, was 33 times. A prolonged outlook for high growth can keep valuations elevated, and if the current multiple remains in place by the end of this year, the fund would hit $748, up 25% from its current $601.

Don't cash in your chips yet.

Jacob Sonenshine is a stock picks writer at Barron's Investor Circle and regular contributor to The Trader Column. His general focus is technology, consumer, industrial, and healthcare.

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 08, 2026 14:48 ET (18:48 GMT)

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