Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life, from cars, electronic gadgets to planes and weapons. The demand will continue to trend higher given the increased digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail, among others. However, the supply crisis for chips has been prevalent.

Chips ETFs like VanEck Semiconductor ETF (SMH Quick QuoteSMH - Free Report) , iShares Semiconductor ETF (SOXX Quick QuoteSOXX - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ Quick QuoteSOXQ - Free Report) and Invesco Dynamic Semiconductors ETF (PSI Quick QuotePSI - Free Report) have added 44.1%, 39.5%, 39.8% and 29% this year against a 12% gain for the S&P 500 (as of Jun 9, 2023). With this, semiconductor or chip stocks are on their best first-half rally on record, and the uptrend could continue.

Let’s find out why.

CHIPS Bill in U.S., EU & Britain

The CHIPS-Plus bill, dubbed the Chips and Science Act, in the United States, launched last year was a plus. The bill would provide $54 billion in grants for semiconductor manufacturing and research, tens of billions in support to regional technology hubs and a tax credit covering 25% of investments in semiconductor manufacturing through 2026.

The European Chips Act launched this year also looks to help the bloc secure its semiconductor supplies, ensure independence and compete with the United States and Asia on tech. The 27 members of EU reached a 43-billion-euro-deal on the legislation and said the new rules would aim to double the EU’s global market share in semiconductors from 10% to 20% by 2030.

Most recently, Britain launched a $1.2 billion semiconductor plan after the U.S. and EU binge on chips. The investment will form part of a 20-year strategy on semiconductors — which has faced lengthy delays — outlining the U.K.’s plan to secure its chip supplies. The government will initially invest up to £200 million from 2023 to 2025 before expanding its commitments to up to £1 billion in the next decade, per a CNBC article.

Emerging Technologies, AI Boom

The rapid adoption of cutting-edge technology like cloud, Internet of Things, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence (AI), cryptocurrencies, 5G and other advanced information technologies, as well as the solar power industry, should continue to fuel growth.

The latest uptake in the use of AI should also contribute to the semiconductor space. Investors should note that the biggest semiconductor company Nvidia has added immense market cap this year on the AI boom. Nvidia’s super-upbeat Q1 results and guidance should act as a cornerstone for the entire semiconductor industry in the near term.

Cooling Inflation and Rate Hike Momentum

Per Gartner, the global economy slowed down in the second half of 2022 due to high inflation, rising interest rates, higher energy costs and continued COVID-19 lockdowns in China. This impacted many global supply chains.

Consumers also began to reduce spending, with PC and smartphone demand suffering, and enterprises starting to reduce spending in anticipation of a global recession, all of which impacted the overall semiconductor growth.      

However, inflation started to cool in 2023, and the Fed started to lower the magnitude of rate hike. Geopolitical tensions and the regional banking crisis also contributed to the lower rate hikes. This scenario is a plus for high-growth technology companies like semiconductors.