Chip stocks are the cheapest they've been in nearly seven years. How low is too low?

By Philip van Doorn

The PHLX Semiconductor Index sank more than 12% on Thursday, while its rolling 12-month earnings estimate was up 155% from the end of last year

Contrarian investors might see the sharp decline in semiconductor stocks on Nov. 5 as a buying opportunity, especially since soaring earnings expectations have driven valuations to their lowest levels since January 2019.

As the Wall Street saying goes, investors should avoid trying to pick a bottom because cheap can always get cheaper.

But what if valuations are at their lowest in years, and at levels that had previously marked major market bottoms, even as fundamentals still appeared to be improving at a relatively fast rate?

On Thursday, the PHLX Semiconductor Index SOX tumbled 12.2%, its worst day since March 16, 2020, with all 30 components losing ground. The index has plunged 38.5% from its 52-week high of 14,655.29 reached on June 22, 2026.

But beneath the surface, this year's increase in profits for the group runs counter to the remarkable brutal swing. So the obvious question is: Should contrarian traders jump on the chip bandwagon right now?

After Thursday's decline, the SOX was valued at a forward price-to-earnings ratio of 13 - its lowest level since Jan. 23, 2019, when the index closed at 1,185.94, or 87% below Thursday's close.

More recently, the forward P/E ratio - the index's price divided by the weighted rolling 12-month consensus EPS estimate of its components among analysts polled by FactSet - had hit a low of 13.3 on Oct. 14, 2022, which was the day the SOX's 10-month-long bear market ended at a closing price of 2,162.32. The SOX had tumbled 46.5% during the bear market.

Fast-forward to this year, and the valuation isn't falling because prices are declining. Despite the recent selloff, the SOX is still up 27.2% in 2026. The P/E ratio has dropped because the EPS denominator has been soaring. The rolling weighted 12-month EPS estimate for the index has increased by 155%, as some of the heaviest-weighted companies have shown remarkable growth in sales and profits, driven by the AI infrastructure build-out.

While the SOX's forward P/E ratio is now less than half the index's valuation of 26.1 at the end of last year, projections from Wall Street analysts are for the SOX to show an aggregated compound annual growth rate (CAGR) for sales of 40.2% from 2026 through 2028. That's more than four times the projected sales CAGR of 8.7% for the S&P 500, which traded at a considerably higher forward P/E of 17.8 as of Thursday's close.

In an email exchange with MarketWatch, Giuseppe Sette, the co-founder of Reflexivity, said that the current valuation for SOX was comparable to "almost the exact bottom" in October 2022.

"The SOX roughly tripled off that area over the following two years" as spending to build out artificial intelligence exploded," Sette wrote. "Buying the group at that multiple was one of the best semiconductor entries of the decade."

According to Sette, investors need to ask: "Do you believe the EPS estimates?"

If you are a long-term investor who believes the EPS estimates will hold, Thursday's action may provide a golden buying opportunity.

"The valuation isn't the question anymore - the durability of the 155% EPS ramp is," Sette concluded.

According to Hendi Susanto, the portfolio manager of the Gabelli Global Technology Leaders ETF GGTL, "the outlook for semiconductors and semiconductor equipment remains solid through the remainder of 2026 and into 2027."

He told MarketWatch that there is "a high probability that 2028 will be another strong year."

Susanto's projections are based on comments from executives at hyperscalers (the Big Tech companies funding AI-related infrastructure expansion) that "energy is not the number one supply constraint," but that a shortage of high-end graphics processing units and chips remains the biggest supply challenge.

Susanto said that both shortages are "bottlenecks the hyperscalers have to overcome," and that "power takes longer, with a longer lead time, than chips."

Then again, despite the historically cyclical nature of the semiconductor industry, which helps explain some very low P/E valuations for companies listed below, things might be different during the current technology investment phase.

Susanto cited SK Hynix (SKHY), as an example, with that company saying that its 2027 production of memory equipment has already been sold out. "They are working on 2028 supply agreements with major customers. That is somewhat unprecedented - customers making commitments one year ahead," Susanto said.

To sum up Thursday's market action, Susanto said bearish investors were "pointing to possibilities, what-if scenarios," and risks out to 2028. But there were still some investors seeing buying opportunities, as they focused more on "strong demand over supply constraints and the sustainability of the economic value of AI."

Largest components of SOX

Here's how much the largest 10 components of SOXX fell on Thursday, and how their forward P/E compared with their valuations at the end of 2025:

 
Company                                    Nov. 5 price decline  2026 price change  Decline from 52-week high  Forward P/E  Forward P/E at end of 2025 
Nvidia                                                    -9.3%              -2.6%                     -25.4%         12.7                        25.3 
Taiwan Semiconductor Manufacturing ADR                   -10.8%              16.2%                     -27.6%         15.9                        24.4 
Broadcom                                                 -10.4%             -15.8%                     -41.1%         14.9                        32.0 
Micron Technology                                        -17.5%             130.0%                     -47.7%          3.6                         8.3 
Advanced Micro Devices                                   -17.3%              88.8%                     -38.6%         25.1                        32.7 
ASML ADR                                                  -9.3%              26.8%                     -32.2%         22.3                        35.1 
Intel                                                    -10.3%              41.6%                     -63.3%         29.7                        61.9 
Texas Instruments                                        -10.7%              60.3%                     -16.7%         24.8                        28.5 
Applied Materials                                        -13.6%              24.2%                     -56.8%         16.9                        26.1 
Lam Research                                             -16.4%               8.2%                     -57.8%         17.6                        32.5 
                                                                                                                                       Source: FactSet 

Click on the tickers for more about each company.

Don't miss: Watch out for Big Tech companies like Meta and Alphabet issuing more shares and diluting your stock ownership

-Philip van Doorn

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11-06-26 0704ET