Semiconductor stocks, represented by the VanEck Semiconductor ETF (SMH), are showing outperformance relative to the Nasdaq-100 (QQQ) at levels not seen since the dot-com bubble, signaling a potential secular bull market driven by AI advancements. Despite the historical comparison, expert analysis leveraging both technical patterns and fundamental valuations, particularly for NVIDIA (NVDA), suggests this trend is robust and sustainable, not a bubble.
NVIDIA’s projected revenue growth is exploding from billions to hundreds of billions, yet its forward valuation remains surprisingly low at 23.7 times earnings, making it appear ‘cheap’ historically. This unique combination of accelerating technical trends and strong, undervalued fundamentals leads to a recommendation to increase semiconductor allocation in portfolios.
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The recovery in the Nasdaq has been remarkable, but the performance of the VanEck Semiconductor ETF (SMH) relative to the Nasdaq-100 (QQQ) is truly striking. The weekly ratio chart of SMH/QQQ has surged to a 26-year high, marking an all-time high dating back to May 2000, just two months after the peak of the dot-com bubble. While this echo of the past might raise concerns about another impending bust, expert analysis suggests otherwise.
This unprecedented outperformance by semiconductors within the broader tech sector, characterized by a break to new highs, is not typically observed at the tail end of a market trend. Furthermore, a closer look at key semiconductor players reveals that fundamental valuations are far from being in 'bubble-icious' territory. Semiconductors, which constitute roughly 30% of the Nasdaq-100 ETF, have been crucial drivers of market gains not only since the March lows but throughout the rally that commenced in 2015.
Technical analysis of SMH from 2018 shows strikingly consistent bullish waves. The first major wave from the 2020 lows saw a 232% rally at a 42-degree angle. The subsequent wave, driven by the AI buildout post-2022, generated a 239% rally at a 41-degree angle. Fast forward to today, and we are in a third cyclical bull trend from early 2025 lows, which has so far advanced 'only' 207%. Projecting a similar 235% rally would target SMH at approximately $571, a crucial decision point. Should this level be surpassed, it would imply a shift beyond cynical cyclical trends into a larger, secular bull trend. Further supporting this, the current trend is accelerating at a 52-degree angle, indicating robust, non-typical market behavior for a mature trend ripe for reversal.
While technical patterns are vital for timing and risk management, fundamentals are key for selection. Blending both, a deep dive into NVIDIA (NVDA) reveals a compelling picture. Despite trading sideways for the past year, threatening a breakthrough of the $200 mark, its underlying financials are explosive. Annual revenue, which was in the twenty-something billions from 2021-2023, is now projected by analysts to reach two hundred-something billions in the coming years. For a company with a market capitalization exceeding $4 trillion, such year-over-year growth rates are astounding.
What truly stands out is NVDA's current forward valuation, trading at just 23.7 times earnings. With calendar year 2026 expected to bring in $8.34 in EPS, this forward P/E is historically 'CHEAP,' often seen after market sell-offs like 2019, 2022, and 2025. The exception was 2024, a period of price consolidation where revenues soared from $26 billion to $60 billion in 12 months. This current consolidation phase, coupled with a 23x forward P/E, presents a similar opportunity.
With Blackwell chips shipping and sold out, and Vera Rubin on the horizon poised to counter Google's TPU advancements, along with SMH leading the broader market towards breaking its cyclical history, Inside Edge Capital is set to increase its semiconductor allocation. As the saying goes, fundamentals guide 'what' to invest in, while technicals inform 'when' to invest. This analysis suggests the time for semiconductors is now.
