Given that valuations of the US stock market have risen to record highs. Investors are making a mad dash into value stocks as the ultimate “reopening trade” based on the premise that vaccines will save the economy. Morgan Stanley’s equity analyst Joseph Moore points out that one part of the market has hit “extended valuations” that will “limit the potential upside.”
Moore’s latest global semiconductor report titled “Great expectations – strong fundamentals are matched by peak multiples,” states the “recent outperformance and extended valuations” of US semiconductor stocks “will limit the potential upside even as supply and demand continue to recover.”
Despite a year categorized by unusual levels of uncertainty due to Covid-19 and trade tensions, stocks outperformed as we believe the 2021 recovery narrative outweighed concerns of near- term gyrations in fundamentals. As a result, we struggle to support the notion that semi stocks will continue to outperform to the same levels we saw in 2020; however, we don’t want to fight the recovery narrative and remain In-Line as continued improvement in industry fundamentals is likely to limit downside. -Moore
The PHLX Semiconductor Sector index has risen nearly 130% since March’s low. Perhaps Moore is suggesting that semiconductors stocks cannot go up in a linear fashion forever.