Chips, AI, and the Weight of History
A perspective on semiconductors, valuations, and the dual truths of long-term investing - by Dwight W. Rich, CFP®
From Bell Labs to the age of AI
In December 1947, three scientists at AT&T Bell Labs — John Bardeen, Walter Brattain, and William Shockley — demonstrated a small device that would quietly change the world. The transistor, as it came to be known, replaced the bulky vacuum tube and made electronics smaller, cheaper, and more reliable. The trio earned the 1956 Nobel Prize in Physics for their work.* That single invention sits at the foundation of everything we now call a semiconductor industry — and by extension, the modern economy. And in 1958–59, Jack Kilby and Robert Noyce placed multiple transistors onto a single substrate, creating the integrated circuit — the microchip — that powers every device you use today.**
We revisit this history not as a footnote, but as context. The revolutionary nature of AI today has genuine historical precedent. The transistor did not merely improve electronics — it made entire new categories of human experience possible. We believe AI is doing the same.
The Philadelphia Semiconductor Index - A parabolic rise — and a cautionary tale
At the height of the dot-com boom, the index returned roughly 160% in 1999 alone — a parabolic ascent fueled by genuine technological promise and extraordinary speculative excess in equal measure. What followed was a collapse so severe that investors who bought at the peak waited nearly two decades to see their money return. That is not a rounding error. That is a generation.
Today, the SOX has delivered a one-year return of approximately 143% as of May 2026, and is up more than 430% since its low in 2022.*** This is, by any historical measure, another parabolic rise — and it demands to be held in the mind alongside what happened in 2000.
SOX Semiconductor Index: Two Parabolic Rises
*** iShares SOXX ETF 1-year return as of May 5, 2026; 2022–present return from October 2022 trough. Past performance is not indicative of future results.
The S&P 500 - Earnings, multiples, and year-end scenarios
The S&P 500 currently trades near 7,250. Wall Street consensus places 2026 earnings per share in a range of $288 to $308. Ed Yardeni, one of the more respected market strategists, has offered a bull case estimate of $310 — an outlook that implies continued earnings resilience despite macroeconomic headwinds including persistent fiscal pressure and tariff uncertainty.
The long-run average price-to-earnings multiple for the S&P 500 is approximately 19.7x since 1957.**** The five-year average has run closer to 22–24x, reflecting the post-pandemic era of low rates and technology optimism. The current trailing P/E sits near 31x — well above both benchmarks. Below, we model year-end price targets under three EPS and multiple scenarios:
BULL CASE | BASE CASE | BEAR CASE |
~$7,750 +7.6% from 7,200 Yardeni $310 EPS × 25x above-avg multiple. AI-driven earnings surprise; multiple expansion holds. | ~$5,940 −17.5% from 7,200 Consensus $298 EPS × 19.9x long-run avg multiple. Multiple compression toward historical norms. | ~$4,032 −44% from 7,200 Low-end $288 EPS × 14x below-avg multiple. Earnings miss + multiple contraction under fiscal/trade stress. |
S&P 500 Year-End Price Scenarios (2026)
**** Historical average P/E sourced from us500.com (since 1957). Scenarios are illustrative and not investment recommendations.
Two Truths - Holding contradictions without going mad
The challenge of investing, as we see it, is the requirement to hold two truths simultaneously — without them by collapsing into either naive optimism or paralyzing fear.
Truth one: stocks are among the most powerful wealth-creation vehicles ever devised. Over twenty to thirty year periods, equity markets have statistically outperformed virtually every competing asset class. That is not opinion — it is a long-run empirical fact.
Truth two: stock prices can fall precipitously and remain depressed for years or even decades. The dot-com crash took 17 years for the SOX to recover. The Nikkei's 1989 peak wasn't revisited until 2024. Drawdowns of 40–50% are not statistical anomalies — they are features of the asset class.
Artificial Interligence technology represents a genuine, revolutionary change to nearly every aspect of life, business, and government — and will create positive outcomes we cannot yet imagine. At the same time, the explosion in developed market sovereign debt, widespread FOMO, and historically elevated valuations are concerns that even casual observers have noticed.
These two observations — transformative technological promise and alarming structural excess — are both true at the same time. They were both true in 1999 as well.
A Word for Retirees and Pre-Retirees - When thirty years is an irrelevant time frame
If you are drawing on your investments to meet living expenses, a 40% drawdown is not a paper loss to be patiently waited out. It is a reduction in your standard of living, a compression of your options, and in severe cases, a threat to your financial security. The math of sequence-of-returns risk is unforgiving: withdrawing from a declining portfolio accelerates depletion in ways that a subsequent recovery may not fully repair.
This is why asset allocation, income planning, and risk management are not afterthoughts for clients in or near retirement — they are the primary work. We remain committed to managing those risks thoughtfully on your behalf, even as we stay invested in the long-term story.
Sources & Disclosures
* Britannica, "The semiconductor revolution"; Wikipedia, "Transistor"; Wikipedia, "John Bardeen"
** TechTarget, "The history of semiconductors and the chip-making industry"; Wikipedia, "Integrated circuit"
*** iShares SOXX ETF data as of May 5, 2026
**** us500.com, "S&P 500 PE Ratio — Current and Historical Data"
***** Advisor Perspectives / dshort, "P/E10 and Market Valuation"; GuruFocus S&P 500 PE Ratio data
This update is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Please consult your advisor before making any investment decisions