Shares of major semiconductor stocks Broadcom (AVGO 1.08%), Advanced Micro Devices (AMD 0.20%), and Arm Holdings (ARM -5.49%) rallied on Tuesday, rising 3%, 3.9%, and 5.3%, respectively.
Chip stocks generally had a good day, as President Trump announced a delay to his threat of 50% tariffs on European Union goods to July 9, seemingly paving the way for negotiations. In addition, a "soft" economic indicator in May's Consumer Confidence readings bounced back in a big way from its April plunge.
Finally, several major chip manufacturers submitted letters to the Department of Commerce regarding upcoming potential semiconductor tariffs. Included was a threat from Taiwan Semiconductor Manufacturing (TSM 0.51%) that significant tariffs could derail its announced U.S. projects. Of note, all three of these companies produce their chips at TSMC's Taiwan fabs currently.
A good bounce back for semiconductors
Semiconductors have been some of the most sensitive to the ongoing trade and tariff controversies of the young Trump administration. While semiconductors are a long-term growth industry, the industry can be quite cyclical. Therefore, concerns over growth slowdowns or recessions are likely to cause turmoil in these stocks.
In addition, given the very-international nature of semiconductor manufacturing, supply chains, and materials, semiconductors are doubly sensitive to all the tariff uncertainty. Will chips be tariffed? If not, what about the devices they go into, which are largely assembled overseas? How about the materials and chipmaking equipment that chipmakers use -- for instance, EUV machines, which are only available from the Netherlands?
As such, the Trump administration's threat of 50% tariffs on E.U. imports sent these stocks downward on Friday. But on Sunday, President Trump announced an extension to the tariff threat to July 9 on his social media platform Truth Social, giving relief and room for continued negotiations.
In addition to that relief, most economically sensitive stocks rallied upon this morning's Consumer Confidence readings for May. According to this month's survey from The Conference Board, consumer confidence bounced back in a big way to a 98 reading. That's a massive beat over the expectations of 86.3, and a 12-point increase over the April lows.
During May, President Trump walked back more of his April tariff threats, perhaps most consequentially the highly punitive 145% tariff on China on May 12, to "just" a more manageable 30%, while trade talks continued.
Given increased consumer sentiment will go a long way toward staving off a recession, it's no wonder chip stocks moved significantly higher today.
Image source: Getty Images.
Finally, a potential threat from TSMC to the Trump administration could be adding additional fuel to these stocks, which largely have their chips manufactured by the Taiwanese manufacturing giant in Taiwan.
The Trump administration is still contemplating tariffs on foreign-made semiconductors in an effort to spur investment in U.S. chipmaking. To ease the administration's concerns, TSMC pledged an additional $100 billion investment in the U.S. a couple of months ago in March.
However, that wouldn't necessarily exempt TSMC from tariffs. Last week, leading chip manufacturers all wrote responses to the U.S. Commerce Department's ongoing investigation into semiconductor tariffs under Section 232 of the Trade Expansion Act of 1962.
In TSMC's letter, TSMC Arizona Secretary T.C. Morris Cheng wrote that the imposition of tariffs on chips or equipment could threaten the viability of those future manufacturing plants announced by TSMC back in March, which were announced to great fanfare, along with leading Trump administration officials.
Publishing this letter could also be helping the stocks of these chipmakers, who all produce chips at TSMC's Taiwan fabs today. The thinking could be that the Trump administration would exempt chips made by TSMC's current leading-edge operations in Taiwan, to preserve that massive investment in the U.S. If those chips are exempt, they would theoretically stay more affordable and wouldn't be disadvantaged relative to rival chips made in the U.S.
Chip stocks could see a further rally on the back of AI
In addition to the tariff and trade relief, chip stocks may also be looking forward to Nvidia's (NVDA 3.23%) earnings tomorrow. Nvidia's results are often used as a proxy for the strength of artificial intelligence (AI) infrastructure investment generally. And although Broadcom's ASICs and AMD's MI-series chips compete with Nvidia in that area, positive results could boost confidence in the overall sector. Meanwhile, Nvidia also uses Arm-based licenses to produce its own Grace CPUs that complement its GPUs, so Arm often trades alongside Nvidia as well.
Last week's decline and Tuesday's bounce back just go to show that leading semiconductor stocks are some of the most volatile in the market. However, long-term investors riding out the ups and downs have profited handsomely. The sector has been the best-performing in the market over the past decade.
