• Silicon chip wafer-maker cautions of a slower-than-expected second-half recovery
• Global semiconductor stock index on the slide
• Chip stocks have a good record as a proxy for global stock markets

"When a company says its earnings are going to be more heavily weighted toward the second half of the year, this can be down to seasonal factors, but it can also be a sign that management is crossing its fingers and hoping for the best," says AJ Bell investment director Russ Mould. "That strategy is not working out at silicon chip wafer maker IQE, which is warning that the hoped-for upturn is not coming through as quickly as anticipated. This leaves the firm's shares at a fifteen-year low and could have implications for firms with a market valuation much bigger than IQE's £100 million - all the way through to Apple, the world's second-most valuable public company.

Source: LSEG Refinitiv data

"IQE is a key part of the semiconductor food chain, as it prepares the large discs, or wafers, which are then used to manufacture silicon chips. It is particularly important to areas such as mobile telecommunications, thanks to its expertise in gallium arsenide (GaAs), silicon germanium (SiGe) and indium phosphide (InP) wafers.

"Its so-called epitaxial wafers are then used as the basis for chips that are used in specialist functions and products, such as mobile handsets, mobile telecom network infrastructure, 3D imaging and sensing and photonics systems for fibre-optic telecoms networks. Chips products from its wafers are ideal for chips that facilitate communications at higher frequencies and with higher power ranges.

"It is therefore concerning to see IQE warn of slower-than-expected demand, especially in the consumer-related industries that it serves. The Cardiff-based company, which also has facilities in the USA and Taiwan, now expects sales to come in broadly flat at £115 million in 2024 and profits, based upon management's preferred metric of adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA), to show only modest progress from 2023's total of £4.3 million.

Source: Company accounts, Marketscreener, management guidance alongside profit warning of 18 November

"It could be that the problems are company specific, especially as chief executive Americo Lemos left abruptly in late October. This is possible, since forecasts from industry experts such as World Semiconductor Trade Statistics (WSTS), the Semiconductor Industry Association (SIA) and Gartner are predicting a 16% increase in global semiconductor sales to a new all-time high in 2024, north of $600 billion for the first time, with a further 12% advance in 2025.

Source: WSTS, SIA, Gartner, Statista

"However, the Philadelphia Semiconductor Index, or SOX, a thirty-stock benchmark of global silicon chip and semiconductor production equipment (SPE) makers, seems less convinced.

"The index is down by 18% from its summer peak and is thus teetering on 'bear market' territory.

Source: LSEG Refinitiv data

"Profit warnings from Qorvo and Amkor, to name but two, seem to have raised concerns, especially over the communications and smartphone portion of global chip demand, since both are big suppliers to Apple. Disappointing upgrade data from all three of the big US mobile carriers in Q3, Verizon, AT&T and T-Mobile, were also a red flag. Apple will have benefited in its last quarter from selling into retailers and carriers, but if sell-out is poor in the current quarter then Apple could yet struggle to meet analysts' forecasts for its three-month period to December 2024 - and its $3 trillion market cap and forward price/earnings ratio of 30 for the year to September 2025 leave little margin for error.

"It may be that the apparent boom in global chip sales is largely down to demand for AI chipsets, with other key segments such as communications, industry and consumer struggling. Nvidia's thumping sales and profit progression and stock market valuation, which now exceeds that of Apple, is at least consistent with such a view, but weakness in end markets beyond AI could have wider implications.

"Stock markets are pricing in a soft landing at worst for major Western economies (and no landing at all in the US) so any signs of slack end-demand could be a concern for two reasons.

"First, the $600-billion-plus global semiconductor industry can be seen as a good guide to global growth, since silicon chips are so ubiquitous.

"Second, the SOX index and its members can be a good guide to investor sentiment.

"History is by no means guaranteed to repeat itself, but the SOX topped out six to nine months before the S&P 500 and FTSE All-World did so in 2000 and 2007, to herald two thumping bear markets, and then bottomed out before those headline indices did in 2002 and 2009, to signal the start of a new bull market.

"If the SOX's long rally that started in late 2022 has started to run out of puff that could be a warning sign that global stock markets' preferred narrative of cooling inflation, a soft economic landing and global interest rate cuts is facing its latest challenge, after a period when it has worked out pretty well."

Source: Refinitiv data