Chip stocks rise sharply as Big Tech spends more on AI data centers

In short: Shares of many chip companies are rising quickly because big tech firms are buying more hardware to run AI.

What's going on

Chip stocks are having one of their strongest runs since the late 1990s dotcom era, when internet stocks surged. The Philadelphia Semiconductor Index, which tracks 30 large chip companies listed in the US, is up about 75 percent so far this year.

The Financial Times reports the index added more than $5 trillion in market value in the past two months. That rise is being linked to growing expectations that chip makers will earn more money as demand increases.

One big driver is spending by Meta, Alphabet, Amazon, and Microsoft on data centers, which are large buildings filled with computers (think of them as factories for computing power). The FT says the four companies have set aside $725 billion this year for data centers and related equipment.

The rally is not only about Nvidia, even though it remains the world’s largest public company by market value. Competitors like AMD, Intel, and Arm have risen faster this year, as investors bet that more kinds of chips will be used for AI over time. Some of the focus is shifting from GPUs (graphics chips often used for AI) to CPUs (general purpose chips, like the main engine in many computers).

What to watch

Some market watchers are warning that excitement can cool quickly if the economy weakens. If a recession hits, big tech companies may cut back spending, and rising chip prices could eventually reduce demand, similar to how higher gas prices can lead people to drive less.

Source: Financial Times