Rising investor optimism, impressive breakthroughs, and the $52 billion CHIPS Fund Act should enable the semiconductor industry to address the supply chain bottlenecks and foster long-term growth. Prominent large-cap chipmakers Taiwan Semiconductor Manufacturing (TSM) and Applied Materials (NASDAQ:AMAT) are well-positioned profit substantially. However, amid the ongoing market volatility and other industry challenges, overvalued stocks NVIDIA (NVDA) and Advanced Micro Devices (NASDAQ:AMD) could suffer a downtrend in the near term.The global semiconductor industry witnessed a 24% year-over-year sales growth in October 2021. However, given the continuing chip shortage, governments and corporations are making considerable efforts to increase funds and provide incentives to help companies ramp up chip production and address the ongoing supply-demand shortage. As a result, the global semiconductor shortage is expected to ease by the end of 2022.
Moreover, innovation in the chipmaking process and manufacturing of advanced chips should foster the industry’s growth. Growing investor optimism in this space is evident in the SPDR S&P Semiconductor ETF’s (XSD) 1.2% gains over the past month, versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026. As a result, fundamentally-sound large-cap stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and Applied Materials, Inc. (AMAT) should benefit substantially.
However, given the current challenges faced by the industry and ongoing market volatility, overvalued stocks in this space, NVIDIA Corporation (NASDAQ:NVDA) and Advanced Micro Devices, Inc. (AMD), will likely remain under pressure in the near term.