The semiconductor industry has been experiencing a phenomenon known as derating, where the prices of semiconductors have been steadily decreasing despite increasing demand. According to Privorotsky, there is no single catalyst behind this trend but rather a combination of factors that are causing concern among investors and analysts.

One of the main concerns is the growing focus on AI financing backstops and off-balance-sheet commitments. As credit begins to ask questions about equities that had largely been ignored, the CDS (credit default swap) of NVDA and Broadcom have widened materially. This highlights the increasing scrutiny being placed on the financing mechanisms behind the semiconductor industry’s rapid growth.

Another concern is the growing inventory builds across parts of the semi chain. As Street dialogue turns to this issue, it raises questions about the speed and ultimate capacity of the buildout. Power bottlenecks and policy pushback around data centers are also creating uncertainty, further complicating the industry’s growth trajectory.

While these concerns may not kill the AI story entirely, they do suggest a wider range of outcomes for the industry. As a result, the SOX (Semiconductor Index) 24-month forward P/E has already compressed from roughly 21–22x to around 15x. This compression suggests that investors are becoming more cautious about the multiples they are willing to pay for semiconductor stocks.

To illustrate this point, the volatility of the SMH (Semiconductor Index) has been “chilling,” according to Privorotsky. The chart accompanying this article shows that the index’s volatility has increased significantly in recent months, indicating a higher degree of uncertainty among investors.