CHIPS Ahoy!

September 06, 2023 | Thomas Neuhardt, Associate Research Analyst

The U.S. Department of Commerce recently celebrated the one-year anniversary of the CHIPS and Science Act, which was signed into law on August 9, 2022. This federal statute provides nearly $280 billion in new funding and is aimed at boosting domestic research and manufacturing within the semiconductor sector. Additional goals of the statute include increasing onshore manufacturing jobs, bolstering domestic supply chains, and improving the positioning of the United States within the global semiconductor space. Specifically, the CHIPS and Science Act provides over $52 billion for U.S. semiconductor research, development, and workforce enhancement, including $39 billion in manufacturing incentives and $13 billion for research. Also included within the statute is a 25% investment tax credit for capital expenses related to the manufacturing of semiconductors and similar equipment.

U.S. Census Bureau data on private manufacturing construction spending by industry can be analyzed to help determine the effects of the CHIPS and Science Act on business activity. To that point, over the last decade, private manufacturing construction spending in the computer, electronic, and electrical industries (“CEE”) represented less than 15% of total domestic manufacturing construction spending. However, spending on CEE-related manufacturing construction increased significantly within the last 12 months, surging to more than $110 billion at the end of July. This spike in spending represents an increase of roughly 125% over the last year, and CEE expenditures now account for more than 55% of total private manufacturing construction outlays in the United States.

Perhaps unsurprisingly, the return of the S&P 500 Semiconductor & Equipment index is significantly in excess of that of the broader S&P 500 index since the CHIPS and Science Act was passed (53.7% vs. 13.3% for the trailing 12-month period ending July 31). While a portion of this rally can be attributed to optimism surrounding the prospects of artificial intelligence, the increase in manufacturing spending detailed above has also been a material tailwind for semiconductor companies and those in related industries. Additionally, the fact that the statute contained a clause that prevents companies from using taxpayer money to repurchase stock or issue dividend payments suggests that the majority of recent gains within the semiconductor space reflect organic growth. The sector could be poised for continued strong performance given the importance of semiconductors across the globe, however, investors should weigh any potential benefits offered by the space against risks which include increasingly lofty valuations.

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