That’s the thesis from BCA Research, and it’s a view they have strong feelings about. “We warn that the S&P semi equipment all-time highs look more like a mania, eerily similar to the dotcom bubble era,” BCA analysts said in part one of a two-part series laying out their case.
That’s right: semiconductors, the chips inside the computers that increasingly power our lives, are the Pets.com and Geocities of 2019.
To be sure, part of BCA’s argument rests on valuations, which are sky-high. So far this year, the S&P Semiconductor Equipment Index has surged nearly 84%, according to FactSet, nearly four times the rise in the S&P 500
“Relative forward profits are way behind relative share prices as investors have extrapolated the recent positive trade news far into the future,” BCA analysts explained. “As a reminder this index has a 90% foreign sales exposure with roughly 30% of sales originating from China.”
BCA also has some macro fundamental reasons for caution. A trade group called World Semiconductor Trade Statistics said in August that demand will decline 13.3% in 2019, “returning to growth” in 2020. (This MarketWatch story lays out a more bullish case for some recovery.)
Still, the U.S. manufacturing sector remains in contraction, for the third month in a row, the analysts pointed out. That signals that the lofty valuations for the semi sector are “unwarranted and bound to return to earth,” they said. “While bulls would buy this breakout, we are sticking our necks out and recommend selling into strength.”