Listen to the audio version of this article (generated by AI).
The stock market’s hottest sector looks ready to take a break.
The semiconductor sector has been leading the market higher for all of 2026. SMH – the VanEck Semiconductor ETF – is up 80% so far this year, versus a 10% gain in the S&P 500.
Now though, the chip stocks are overbought and overextended to the upside. They’re likely to decline or consolidate for the next few weeks while the lagging sectors of the market play a game of catch-up.
That’s not a popular opinion, of course. Most Wall Street analysts are tripping over each other raising their price targets on the chip stocks. Investors are throwing fresh money into the sector. Just about everyone thinks the boom will continue.
Maybe it will. No one really knows for sure.
But, before you go and chase stock prices higher into extremely overbought conditions, consider this…
Relative to the S&P 500, the semiconductor sector is trading at its highest level – ever.
Look at this ratio chart comparing the performance of the semiconductor sector ETF (SMH) to the S&P 500…
The higher this chart is, the more expensive the semiconductor sector is to the S&P 500. As you can see, from a relative value perspective, semiconductor stocks are more than twice as expensive as they were during the dot-com boom.
When a rubber band gets stretched this far one of two things has to happen…
Either the S&P needs to rally to catch up to the semiconductors. Or, the semiconductors have to decline to come back in line with the rest of the market. Or… some combination of those two.
Either way, the upside in the semiconductor sector is limited from here and the downside is substantial.
Some folks will argue we’re in a new paradigm. The semiconductor industry is fueling the growth of artificial intelligence. We’re in the early innings of the game. The higher relative value is justified. It doesn’t make any sense to compare it to valuation levels from 25 years ago.
That’s a fair argument. So, let’s look at just the past year…
The relative value of SMH to the S&P 500 is twice the level at which it was trading this time last year. This condition, along with the unbridled enthusiasm investors and analysts are showing for the sector, creates a vulnerable situation. The semiconductor stocks are overbought and over-loved. They’re due for at least a pause, if not something more dramatic.
The last time we had this sort of setup in the chip sector was back in October 2025 – just before earnings season. Regular readers will recall we turned cautious on the sector, citing similar reasons as we’re citing today.
SMH fell 13% over the next three weeks.
A similar decline this time around would take SMH from its current level near 595 to 518 – effectively wiping out all of the gains of the past month.
Best regards and good trading,
Jeff Clark
Editor, Market Minute