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Is the Super Cycle for Semiconductor Stocks Nearing Its End?

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The marvelous run of the semiconductor stocks that started in the second half of 2016 seems to be fading with one bad news after another. The industry, which is still reeling under the effect of Morgan Stanley’s Nov 27 report on NAND prices, received a new blow last Friday in the form of a corporate tax rate cut, which, analysts believe will hurt the entire technology sector.

The House and Senate, on Dec 1, approved the government’s proposal of cutting the corporate tax rate to 20% from the current 35%. This is a huge achievement for President Trump, as he will be able to fulfill one of his most ambitious electoral commitments in nearly more than a year of his election.

However, this does not go well with the technology stocks as the sector enjoys several tax benefits and therefore has lower effective tax rate. Citing the S&P Global data, Bloomberg stated, “Among sectors, the 18.5 percent effective tax rate enjoyed by the group is the third-lowest among U.S. large caps.”

Analysts believe immediate beneficiaries of the recent tax reforms will be companies across sectors like finance, telecom, consumer discretionary and industrials which fall under the high tax bracket.

In such a scenario, investors are likely to move their funds into sectors that will gain the most due to the latest tax reform. In fact, the process has already started, as reflected by the 2% decline in the Technology Select Sector SPDR ETF (XLK - Free Report) value over the last two trading days.

Semiconductor Stocks Worst Affected

Although tech heavyweights, including Apple, Microsoft, Facebook and Alphabet, witnessed fall on Friday’s tax cut news, semiconductor stocks have been affected the most.

In the semiconductor space, some prominent stocks like Advanced Micro Devices (AMD - Free Report) , NVIDIA Corp. (NVDA - Free Report) and Micron Technology, Inc. (MU - Free Report) have plunged nearly 7.9%, 7% and 5.9%, respectively since the news surfaced. Also, the iShares PHLX Semiconductor ETF (SOXX - Free Report) has lost approximately 3.5% of its value in the last two trading days.

Cash In Before the Super Cycle Ends

The latest tax reform has also fueled the controversy about the end of the semiconductor super cycle, which first sparked in late November, when Morgan Stanley downgraded several memory chip makers on concerns of declining NAND prices and disappointing earnings growth projection for 2018.

Some analysts also believe semiconductor stocks will witness massive corrections in share prices due to their hefty valuation. Investors are likely to pull back their investments from tech stocks and look for other sectors which have potentials of giving higher returns.

Looking at the current scenario and hefty valuations of semiconductor stocks, it is wise to cash in your investment before the stocks start tumbling drastically.

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