When the Chips Are Down
Following the midterm elections, investor anxiety about the pace of the artificial intelligence (AI) data center buildout has weighed on AI-related stocks.
Following the midterm elections, investor anxiety about the pace of the artificial intelligence (AI) data center buildout has weighed on AI-related stocks. The selloff has pushed valuations of semiconductor companies, which sit at the center of the AI buildout, well below their historical norms. Where does that leave the technology stocks that play a critical role in powering AI services?
- Semiconductor companies design and manufacture chips that power artificial intelligence. The Philadelphia Semiconductor Index is a representative basket of these stocks, including companies whose chips perform AI computations, store and rapidly retrieve data, manage and convert power, and connect servers across data centers. Together, these companies supply much of the hardware within the data center.
- In the chart above, semiconductor valuations, as measured by the price-to-earnings (P/E) multiple for the Philadelphia Semiconductor Index, were more than one-third below their 10-year average1 and at their lowest level relative to the S&P 500 in at least 25 years2, as of November 5, 2026. That marked a notable shift from June 2024, when the group traded at a premium of more than 60% to the broader market. The index’s P/E had also fallen nearly 50% since the beginning of 2026.
- While valuation multiples could fall further and earnings estimates could decline, we believe a significant amount of bad news could be reflected in these stocks. In our view, cloud providers, enterprises and governments continue to expand data center capacity, and the need for faster, more efficient computing is likely to grow as AI models grow more capable and adoption broadens across industries. Given the strong fundamental outlook we see for AI computing demand over the next few years, we believe many semiconductor stocks appear attractively valued.
1 Source: FactSet, Philadelphia Semiconductor Index. As of 11/5/2026, the index’s next 12-month P/E was 13.4x. Its 10-year average, based on month-end values from 11/30/2016 through 11/5/2026, was 21.1x.
2 Source: FactSet, Philadelphia Semiconductor Index, S&P Global. As of 11/5/2026, the index’s next 12-month P/E of 13.4x was 75% of the S&P 500’s 17.7x, its lowest relative level in data beginning 12/31/1999.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of November 2026. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
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Companies involved in, or exposed to, AI-related businesses may have limited product lines, markets, financial resources or personnel as they face intense competition and potentially rapid product obsolescence, and many depend significantly on retaining and growing their consumer base. These companies may be substantially exposed to the market and business risks of other industries or sectors, and may be adversely affected by negative developments impacting those companies, industries or sectors, as well as by loss or impairment of intellectual property rights or misappropriation of their technology. Companies that utilize AI could face reputational harm, competitive harm, and legal liability, and/or an adverse effect on business operations as content, analyses, or recommendations that AI applications produce may be deficient, inaccurate, biased, misleading or incomplete, may lead to errors, and may be used in negligent or criminal ways. AI companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
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