The PHLX Semiconductor Sector Index, better known as SOX, has doubled in value over the course of 2023. The last time this index posted gains this aggressive was 1999, right before the dotcom bubble turned everyone’s portfolio into confetti.

AI demand is the engine behind the surge

The rally’s origin story is straightforward: artificial intelligence ate the world, and semiconductors are its teeth. The explosion in demand for AI chips, the specialized processors that power everything from large language models to autonomous driving systems, has sent chipmaker valuations into orbit.

Companies like Nvidia, AMD, Intel, TSMC, Micron, and Broadcom sit at the core of the SOX index. These aren’t speculative startups. They’re the firms actually manufacturing the silicon that makes AI possible, which gives the rally at least some fundamental underpinning.

The SOX index is market-cap-weighted, meaning the biggest companies exert the most gravitational pull on the number. When a company like Nvidia goes parabolic, it drags the entire index along for the ride, whether or not every other chipmaker deserves to be riding that wave.

The dotcom parallel everyone’s talking about

The SOX literally hasn’t doubled in a single year since the late 1990s, the period that preceded one of the most devastating crashes in market history. During the dotcom era, semiconductor stocks surged on the promise that internet infrastructure would require endless amounts of computing power. But it didn’t stop the index from losing roughly 75% of its value between 2000 and 2002.

Technical indicators are flashing warnings as well. The Relative Strength Index, a momentum oscillator that measures the speed and magnitude of price movements, has pushed into territory that typically signals overbought conditions — levels not seen since the 2000 peak.

What this means for investors

The semiconductor sector has become impossible to ignore for anyone with exposure to broader equity markets. Chipmakers now represent a significant slice of the S&P 500, meaning that even index fund investors who’ve never heard of photolithography are betting heavily on continued semiconductor growth whether they realize it or not.

For those already holding semiconductor positions, the historical parallel to 1999 doesn’t necessarily mean selling everything tomorrow. The smartest approach might be the least exciting one: taking some profits off the table after a 100% gain, maintaining diversified exposure, and watching how the market digests earnings reports over the next few quarters.