What happened

Shares of semiconductor equipment stocks ASML Holdings (ASML 0.59%), Applied Materials (AMAT -0.91%), and Lam Research (LRCX -3.27%) rallied in November, rising 17.4%, 24.1%, and 16.7%, respectively.

There were several reasons for the across-the-board strength. First, semiconductor stocks had already sold off hard this year through September, as rising interest rates and recession fears caused a huge decline in semis after they recorded a very strong 2021.

But on Nov. 10, a lighter-than-expected inflation report lit a fire under virtually all beaten-down tech stocks, as moderating inflation spurred hope the Fed may slow its interest rate hikes going forward.

In addition, ASML held its 2022 Investor Day, at which it raised its long-term growth outlook despite a soft market this year. Applied Materials then released its fiscal fourth-quarter earnings report, which also showed surprising strength despite a softening semi market. Lam Research had already released its third-quarter earnings in late October, but rode ASML's and Applied Materials' coattails to above-market gains. 

Oh, and Warren Buffett also bought into the sector, buying the stock of these companies' biggest foundry customer.

So what

At its November Investor Day, ASML raised its 2025 outlook about 30% above the figures it had projected as recently as its 2021 Investor Day, and guided for continued growth to 2030. The increased long-term guidance is especially reassuring, since it appears the semiconductor industry is heading into a downcycle this year.

ASML cited a brighter outlook for artificial intelligence and edge computing data centers, as well as the metaverse, which just emerged as a big concept a year ago. Furthermore, ASML highlighted technology sovereignty, such as the passing of the CHIPS Act this past summer, as potentially leading to a 10% incremental increase in foundry investments -- and therefore semiconductor machine purchases -- by 2030.

That long-term projection gave a jolt not only to ASML, but also to Applied Materials and Lam Research, whose etch and deposition machines must be used in conjunction with ASML's lithography machines to produce leading-edge chips.

Applied Materials then followed up ASML's optimism with a better-than-expected earnings report and forecast. There was a lot of hand-wringing coming into Applied's report, as the memory industry had gone into a big downturn, and new regulations regarding chip sales to China from the Biden administration announced in October had caused Applied to revise down its earnings projections last month.

However, when Applied wound up reporting, its adjusted (non-GAAP) earnings per share (EPS) actually came within its original guidance range and well above its October revisions, at $2.03, up 5% year over year. And despite the China regulations kicking in for a full quarter, Applied guided for $6.7 billion in revenue, plus or minus $400 million, and EPS between $1.75 and $2.11 for the January quarter -- about flat quarter over quarter.

Given all the headwinds in the semiconductor industry and Applied's history of conservative guidance, the flat guidance was enough to satisfy fearful investors that had sold off the stock to bargain-level valuations in October.

Finally, all semis likely got a jolt of confidence after Buffett's Berkshire Hathaway disclosed a large stake in the world's largest foundry, Taiwan Semiconductor Manufacturing. TSMC is a huge buyer of ASML, Applied, and Lam Research machines, so a vote of confidence in TSMC is also a vote of confidence in these three companies by association.

Now what

Semiconductor stocks have been known to be cyclical, and we seem to be entering some sort of downturn in the second half of 2022. However, surprising strength from ASML, Applied, and even Lam last month could indicate that investment in semiconductor production may be a bit more consistent than the end sales of actual chips themselves.

The full effect of the chip downturn will likely be felt in the first half of next year, so these three names are not out of the woods just yet. However, if they can get through this downturn without too much of a hit to revenue and earnings, there is the chance these three stocks may shed some of their cyclical reputation and garner a higher multiple coming out of this downcycle. Still, that has yet to be proven out, even after last month's strong numbers.