For the past few years, semiconductor and homebuilding stocks have been the stars of an unlikely buddy movie. Now their fortunes are beginning to diverge.
Though both are in the manufacturing business, fast-growing computer-chip companies like Broadcom Inc. and Nvidia Corp. don’t seem to have much in common with companies like D.R. Horton Inc. and Renmar Corp., which build driveways and put up drywall. Yet over the past five years, the directional movements of stocks in these two groups have mirrored one another.
“Homebuilders and semiconductor companies trade in virtual lockstep,” explains a note from Bespoke Investment Group, which points to an industry benchmark that showed a positive correlation of 0.93 over this period. (A correlation of 1 would be ideal.)
Still, this trend may not last long, Bespoke noted. On Thursday, semiconductor stocks fell 3.5%, while homebuilding stocks rose nearly 7%, marking their best day since November 2022.
What’s going on? The two industries may not have much in common, but they’re both sensitive to interest rates. Home builders benefit because lower interest rates make mortgages cheaper and home prices rise. Semiconductor companies benefit because lower interest rates increase the value of future profits, as projected in analysts’ financial models for several years in advance.
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Homebuilders, which have lagged far behind other markets this year, got a big boost from inflation data on Thursday: The weaker-than-expected reading made it much more likely that the Federal Reserve would start cutting interest rates in September, rather than November as most investors thought a few weeks ago.
Chipmakers could benefit if the Federal Reserve starts gradually lowering interest rates, but that’s a secondary concern for many investors, given the widely differing expectations around AI and how big a role it will play in the economy over the next decade.
Unlike homebuilders, semiconductor stocks are poised to soar into 2024. But recently, many market watchers, including Goldman Sachs and Sequoia Capital, have questioned whether the potential benefits really justify big spending on AI, at least in the near term.
Prices are already soaring
iShares Semiconductor ETF
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With Amazon’s stock trading at 28 times next year’s earnings and Nvidia’s at more than 41 times, there isn’t much room for error. Even investors who were bullish on AI’s long-term potential are increasingly less confident. That inevitably translates into volatile stock price movements.
Black Rock
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As one example, the firm recently touted the potential of AI in its mid-year outlook, telling investors: “The advent of artificial intelligence has rapidly changed the investment landscape. AI-related companies have seen triple-digit revenues and record profit growth that are largely unaffected by interest rates, growth and inflation expectations.”
But when it comes to AI stocks themselves, the firm has clearly grown skeptical, pointing investors to other opportunities: “The semiconductor industry’s 12-month forward P/E has ballooned to twice its long-term average,” BlackRock said.
Homebuilders, by contrast, may not be promising to change the world as we know it, but they’re poised to enjoy steady growth over the next decade thanks to the housing demand of millennials and Gen Z. These stocks face some near-term headwinds, including a sluggish housing market.
As a result, housing stocks trade at much more favorable price-to-earnings multiples than semiconductor companies.
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iShares US Home Construction ETF
Its forward PE is just 12, less than half of semiconductors’ 28. It’s around 22 for the market as a whole.
It makes sense that cheap stocks would soar on positive news, that the future would brighten as interest rates start to fall and the housing market normalizes, finally enabling millions of disaffected people in their 20s and 30s to buy their first homes.
Chipmakers were a big winner for investors in the first half of 2024. It’s unclear if they’ll repeat that in the second half of the year. Homebuilders may not see as much upside, but an improving interest rate outlook and low valuations mean they’re less at risk of striking out.
Email Ian Salisbury at ian.salisbury@barrons.com
