Investing / The Compound Effect
Chip Stocks Just Went on Sale, and Wall Street Is Panicking
| 6 min | By Heath J. Harris
Nvidia trades at 32 times earnings while the S&P 500 sits near 27. The premium that defined chips is gone. Here is what that means for your allocation.
Summary
- Nvidia's trailing P/E has compressed to about 32, close to the S&P 500's 27, after averaging near 70 over the past five years.
- The Philadelphia Semiconductor Index fell nearly 20% from its late-June peak while chip earnings kept growing.
- China's Kimi K3 model sparked a fresh selloff on Friday, echoing the January 2025 DeepSeek scare that Nvidia fully recovered from within five months.
- Memory names like Micron look cheap on trailing earnings, but cyclical stocks often look cheapest right at peak earnings.
- Index fund holders already own these companies at market weight; any added exposure should be small, gradual, and multi-year.
Chip stocks are cheaper than they have been in years relative to the broad market. Nvidia trades near 32 times trailing earnings while the S&P 500 sits around 27, according to mid July 2026 data. The premium that used to separate the best semiconductor names from the average American company has almost disappeared, and that is the actual opportunity worth studying.
There is a strange thing happening in the market this month. The most important company of the decade is trading at nearly the same multiple as the average grocery chain, insurer, and utility in the index. That did not used to be possible.
What the numbers actually say
Nvidia's trailing P/E was 32.44 as of July 14, 2026 (Public.com, financecharts.com). Its three year average was 56.13. Its five year average was 69.62. So the same earnings stream that investors were paying 70 dollars for is now available for 32. Goldman Sachs pointed out that Nvidia's forward P/E of 21.7 sits against a five year average near 72.
Meanwhile the S&P 500 trades between roughly 25.6 and 27.6 on trailing earnings, depending on which source you use (GuruFocus, FactSet). For context, the average of that same modern GuruFocus series is about 25.4.
Read that again. Nvidia at 32. The index at 27. That gap of five points is a rounding error compared to where chips used to trade.
Micron is the cleaner example. Its trailing P/E sat near 19 to 20 as of mid July 2026 (Public.com, financecharts.com), with the shares around 853 dollars on July 17. The 20 year average for Micron is 13.86. Broadcom carried a trailing P/E near 58 to 60 as of July 10 (MacroTrends, Public.com). Intel, for the record, was unprofitable on a trailing basis with negative EPS, so it has no meaningful trailing P/E right now.
Why the premium collapsed
The short answer is fear. The PHLX Semiconductor Index tumbled nearly 20% from its late June peak, threatening official bear territory, with roughly $3.3 trillion of global chip value erased in three weeks (Yahoo Finance). Chip stocks sold off after Samsung earnings fell short of a very high AI bar (CNBC), and the selling gathered pace through Thursday July 16 (Bloomberg). The S&P 500 itself closed at 7,533.77 on July 15, down about half a percent, while the Nasdaq fell 1.47% (CNBC).
So prices came down while earnings kept climbing. That is the whole mechanism. When the numerator falls and the denominator rises, the multiple compresses. A stock can get cheaper without the business getting worse.
Friday's new scare, and the last one
Then Friday added a fresh headline to the pile. A Chinese AI lab called Moonshot released Kimi K3, a nearly 3 trillion parameter model set to be the largest open-weight model ever released, priced around 15 dollars per million output tokens against roughly 50 dollars for the top American model (Fortune). Chips took another leg down on the news. Nvidia fell as much as 3.5% and handed Apple the title of world's most valuable company, and Taiwan Semiconductor dropped 7% on the very day it reported a 77% jump in quarterly profit (CNBC, Fortune).
We have seen this exact movie. In January 2025, DeepSeek's cheap model knocked Nvidia down 17% in a single day and erased $589 billion of market value, the largest one-day loss for any company in history at the time (CNBC). The panic case was that cheap AI models would kill demand for expensive chips. The opposite happened. Cheaper models meant more AI usage, more usage meant more compute, and within about five months Nvidia was back at a new all-time high. By July 2025 it became the first company ever to touch a $4 trillion market cap (Bloomberg, CNBC). Nobody can promise the pattern repeats. But the last time a Chinese model scared this market, the scare was the entry point, and the sellers spent the next five months buying their shares back at higher prices.
The commodity story is over
Here is what changed structurally. Memory used to trade like a commodity. Micron made a boom bust part, the price swung with supply gluts, and the market refused to pay up. That is why the 20 year average P/E is under 14.
This cycle looks different. Memory chip stocks had a massive run this year because a supply crunch, driven by relentless AI demand, let companies set pricing (CNBC). Pricing power is the opposite of a commodity. When a supplier dictates price instead of accepting it, the earnings become more durable, and durable earnings usually earn a higher multiple, not a lower one.
That is the tension. The market is pricing memory like the old cyclical commodity while the businesses are behaving like something more valuable. If the AI demand holds, today's low multiples look like a gift. If it cracks, the low multiple was correct all along.
Where the trap hides
We are not going to pretend this is a one way bet. A bearish analyst compared current valuations to June 2000, right before the dot com bubble burst, and a Bank of America fund manager survey flagged bubble concerns (Forbes, Motley Fool). The S&P 500 Shiller CAPE ratio was 41.75 as of July 1, which is historically expensive for the whole market.
Micron deserves a specific warning. Peak earnings are estimated at 163.85 per share in fiscal 2028 (Seeking Alpha). A cyclical stock looks cheapest at peak earnings, because the P is high and the E is temporarily maxed out. Buying the low trailing multiple right before earnings roll over is the classic memory mistake. The low forward P/E is often a mirage.
How we would think about it
Most of our clients already own these companies. If you hold an S&P 500 index fund, Nvidia, Broadcom, and Micron are already in your portfolio at their market weight. You do not need a special decision to participate in the recovery if there is one.
The reallocation question is really about concentration and conviction. Are you underweight technology after trimming during the run up? Do you have cash sitting idle that you were waiting to deploy? A sector that just fell 20% while the underlying earnings kept growing is a more interesting entry point than the same sector at all time highs in June.
We would size any addition small, treat it as a multi year hold, and ignore the daily headlines. Many analysts are calling this a mid cycle reset and holding their 12 month targets on Nvidia and Micron (Forbes). That is a reasonable base case, not a promise. The move is to decide your target weight, buy toward it in pieces, and let the earnings settle the argument.
If you want help running this for your own plan, our team at Compound Advisory does this work every week.
Ready for a clearer retirement strategy? Schedule your complimentary Retirement Clarity Assessment at https://compoundadvisory.co/retirement-clarity-assessment.
Frequently Asked Questions
Are chip stocks cheap right now?
Relative to their own history, yes. Nvidia trades near 32 times trailing earnings versus a five-year average near 70, and Micron trades near 19 times. Relative to the S&P 500 at roughly 26 to 27 times, the historic chip premium has almost disappeared.
What is Kimi K3 and why did it hit chip stocks?
Kimi K3 is a large open-weight AI model from China's Moonshot AI, priced at a fraction of leading US models. Markets worried that cheap models could reduce demand for expensive AI chips, the same fear that drove the DeepSeek selloff in January 2025.
What happened after the DeepSeek selloff in 2025?
Nvidia fell 17% in one day and lost $589 billion of market value, then recovered to a new all-time high within about five months and became the first company to reach a $4 trillion market cap in July 2025.
Is a low P/E on a memory stock like Micron a buying signal?
Not by itself. Cyclical companies often look cheapest at the top of their earnings cycle because the E is temporarily inflated. If memory pricing rolls over, the low multiple can be a mirage.
Do I need to buy chip stocks to benefit from a recovery?
If you own an S&P 500 index fund you already hold Nvidia, Broadcom, and Micron at market weight. The real questions are whether you are underweight your target, how much concentration you can tolerate, and whether you can hold for multiple years.