Why semis could be due for a breather:

1) $PHLX Semiconductor Index(.SOX.US)$ is up 40% YTD and while not all semis look expensive, many large-caps have become richly-valued, if not frothy. $Arm Holdings(ARM.US)$ trades for 118x forward EPS and 48x forward EV/sales (nuts even if estimates look conservative), a bunch of major semicaps trade for 30-50x forward EPS (they have gen-AI tailwinds across leading-edge and memory, but China’s mature-node spend is a potential headwind) and $Texas Instruments(TXN.US)$ and $Analog Devices(ADI.US)$ (expected, like many other analog semis, to see sales declines this year) respectively go for 37x and 34x forward EPS.

2) There’s lately been a lot of across-the-board chasing/FOMO buying of any semi or hardware stock seen as having gen-AI exposure. $Intel(INTC.US)$ gaining ~8% over the last two days feels like a sign that investors are now reaching.

3) Large-cap tech/growth looks overextended relative to other parts of the market. That makes popular semis vulnerable to broader rotational action.

4) The 2024/2025 growth story for AI capex is now well-understood, even if there’s still room for sell-side estimates to move higher. On the flip side, the drumbeat of articles/reports questioning (rightly or wrongly) the ROI for AI capex has been getting louder lately. Semi sentiment tends to swing on a pendulum between extreme bullishness when investors focus on secular growth and pay no heed to cyclical risks (that’s kind of where a bunch of AI plays are now) and extreme bearishness when cyclical weakness/risks are all that get attention. I doubt AI semis will see the second extreme anytime soon, but it might not take a lot for them to move a bit from the first extreme.

I think this is a good time to look for underappreciated names when it comes to semi longs. Stuff that's out of favor for cyclical reasons or not widely followed, but which still has secular growth drivers (including, in some cases, AI growth drivers), can be had for reasonable prices. But the risk/reward for a lot of the favorites doesn't look as good as it did earlier this year.