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The nVIDIA booth is shown at the E3 2017 Electronic Entertainment Expo in Los Angeles, California, U.S. June 13, 2017. REUTERS/ Mike Blake Acquire Licensing Rights

NEW YORK, Sept 21 (Reuters) – Some of the shine is wearing off shares of Nvidia (NVDA.O) and other U.S. semiconductor companies after a stunning 2023 rally, as investors weigh steep valuations, rising Treasury yields and signs of industry unease.

Chip stocks soared to start the year, with the Philadelphia SE Semiconductor index (.SOX) rising over 50% through July. No stock symbolized the chip industry’s success more than Nvidia, whose shares tripled in 2023 as the company’s market value topped $1 trillion, driven by excitement over the central role of the company’s products in artificial intelligence applications.

But performance for the group has stalled. The SOX semiconductor index is off over 7% this month, versus a 2.3% drop for the broad S&P 500 (.SPX), while shares of Nvidia – a driver of the broader market’s rally this year – have declined more than 14% in September.

“They have definitely lost some momentum,” said King Lip, chief investment strategist at Baker Avenue Wealth Management. “Many of these chip names got that AI boost. Some of that fervor has kind of simmered down.”

As the stocks rose this year, so did valuations. At the end of July, the 21-stock S&P 500 semiconductors and semiconductors equipment industry group (.SPLRCSE) was trading at 28.5 times forward 12-month earnings estimates, compared to its 10-year average P/E of 16.5 times, according to LSEG Datastream.

Even with this month’s declines, the group still trades at a forward P/E of 23.5 times.

“Coming out of the pandemic and with this rise in popularity and race for AI-related innovation, that created a tailwind for semiconductor stocks,” said Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management.

With “some of the names that really have catapulted to the top, now you are starting to question valuations,” Mahn said.

Valuations are coming under further pressure from the rise in Treasury yields. Higher yields on Treasuries – which are seen as virtually risk free – offer investment competition to equities, viewed as a riskier asset class.

Yields jumped on Wednesday, with two-year yields hitting 17-year highs, after the Federal Reserve signaled a policy of interest rates staying higher for longer.

Nvidia’s recent weakness has come even after it far exceeded expectations with its revenue forecast when it reported quarterly results in late August. Other big semiconductor stock decliners in September include Lam Research (LRCX.O) down 12%, and Applied Materials (AMAT.O) and KLA Corp (KLAC.O), both off about 10%.

Interest in the AI sector from retail investors is also waning, according to VandaTrack, which tracks retail activity.

Industry-specific issues are weighing on the group as well, investors said, including ongoing tensions between the United States and China over semiconductors. Washington is considering restrictions on sales of AI microchips, following export controls last year to cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment.

In another blow, Reuters reported on Friday that Taiwan’s TSMC (2330.TW) has told its major suppliers to delay the delivery of high-end chipmaking equipment, as the world’s top contract chipmaker grows increasingly nervous about customer demand. Shares of several TSMC suppliers fell after the report.

Meanwhile, the early buzz following last week’s initial public offering of Arm Holdings has worn off, with shares of the chip designer down for a fifth straight day.

Of course, many chip stocks are sitting on substantial gains for the year and this month may only be a temporary setback.

Investors should look for dividend-paying chip companies with strong balance sheets trading at reasonable valuations, said Mahn, whose firm holds shares of Analog Devices (ADI.O) and Broadcom (AVGO.O).

“I do believe there are opportunities in semiconductor stocks going forward,” Mahn said.

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