The semiconductor industry faced a year of divergence, driven by Nvidia’s extraordinary rise and the uneven performance of chip indices. While artificial intelligence (AI) revolutionized the tech landscape, its benefits concentrated on a few companies, leaving others lagging behind.

The Growth of Nvidia and AI Chips
Nvidia’s dominance, underscored by its 178% surge in 2024, highlighted the industry’s tilt toward AI chips. The VanEck Semiconductor ETF (SMH), with substantial exposure to Nvidia, gained 42%, while the global MSCI ACWI Chip Index soared 61%, largely thanks to its 55% allocation to Nvidia. Similarly, Broadcom and TSMC capitalized on the AI boom, bolstering the performance of indices that emphasized their weightings.

However, not all chip indices shared in the prosperity. The Philadelphia Semiconductor Index (SOX) climbed 23%, and the SOXX index rose a modest 16%, hindered by lower exposure to Nvidia, Broadcom, and TSMC. These indices reflect a broader trend: the chip sector’s success was concentrated in companies driving AI advancements, while others struggled.

Despite Nvidia’s meteoric rise, the industry faced significant headwinds. Analog chip companies, including Texas Instruments and NXP, suffered from excess inventory, which drove stock declines. Export restrictions to China further impacted companies like ASML, whose shares fell 5% in 2024.

The divergence between AI-focused companies and traditional chipmakers underscores a bifurcation in the market. As Assaf Barel Handali, investment manager at Menora Mivtachim, noted, excluding Nvidia, Broadcom, and TSMC would turn the SMH ETF’s 43% gain into a loss.

While the first half of 2024 spotlighted chip stocks, the second half marked a resurgence in software. Microsoft’s Copilot and Salesforce’s AgentForce showcased AI-powered solutions, driving a 21% rise in the IGV software index. This shift narrowed the performance gap between chip and software indices, illustrating the evolving tech landscape.

Other technology sectors also captured investors’ attention. The XLC communications index, led by Meta and Netflix, rose 38%, buoyed by Meta’s 75% and Netflix’s 88% gains. Meanwhile, the IPAY index, linked to payment technologies, delivered a 31% return, reflecting renewed interest in crypto-related companies like Coinbase.

Conversely, robotics and AI (ROBT) gained only 4%, while the Global X Cloud and HACK cyber indices grew by 11% and 27%, respectively.

Looking Ahead to 2025
As we approach 2025, the dominance of mega-cap stocks like Nvidia, Microsoft, and Alphabet raises concerns. High valuations and concentrated exposures present risks if demand cools or market conditions shift. The underperformance of small-cap indices like the Russell Index (up 16%) signals reduced investor appetite for smaller firms.

Past experience shows that heavy reliance on market leaders may lead to volatility. While the semiconductor sector continues to transform, diversification and strategic weighting will remain crucial for navigating its complexities.

In the shadow of Nvidia’s triumph, the semiconductor industry’s future hinges on balancing innovation with broader growth across the sector.

Image credit: Freepik.com