CHIPS Ahoy!

September 06, 2023 | Thomas Neuhardt, Research Associate

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Combination line and area chart showing cumulative return of the S&P 500 Semiconductors & Equipment Index and value of private construction put in place by sector. Chart subtitle: The CHIPS and Science Act has helped provide a tailwind for semiconductor companies over the last year. Chart source: Bloomberg and U.S. Census Bureau as of July 31, 2023. Chart visual description: Data is monthly; displayed in 6-month increments on x-axis from Aug-13 to present. Left Y-axis is labeled “Value of Private Construction Put in Place” and ranges from $0B to $210B (labeled through $200B). Right Y-axis is labeled “Cumulative Return” and ranges from 0% to 1000%. Sectors corresponding to left axis are as follows: Computer/Electronic/Electrical uppermost of area stack in green; Chemical in blue; Food/Beverage/Tobacco in purple; Transportation Equipment in teal; Plastic/Rubber in dark blue; Nonmetallic Mineral in orange; Fabricated Metal in dark green; Other in gray. Line corresponding to S&P 500 Semiconductors & Equipment Index is slate, corresponding to right Y-axis. Chart data description: Please contact us for the full dataset. Latest data as of July 2023: S&P 500 Semiconductors & Equipment Index at 907% cumulative return; CEE at $110.9B; Chemical at $37.8B; Food/Bev/Tobacco at $15.9B; Transp Equipment at $9.1B; Plastic/Rubber at $2.2B; Nonmetallic Mineral at $1.9B; Fabricated Metal at 1$.4B; Other at $21.5B. End chart description. See disclosures at end of document.

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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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Thomas Neuhardt
Research Associate

Get to Know Thomas

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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