(Bloomberg) -- A sizzling rally in global semiconductor stocks this week is starting to look illusory as a slew of disappointing earnings from major chipmakers pointed to a likely protracted downturn for the sector. 

The Bloomberg Asia Pacific Semiconductors Index sank 1.6% Friday after gaining 6.7% earlier in the week. Taiwan Semiconductor Manufacturing Co. led the decline, dropping 2.9%. A gauge of European chip stocks fell for the first time in six sessions, and the selloff looks likely to spill over to the US, where the Philadelphia Semiconductor Index has jumped 8.8% this week.

Optimistic investors had been hoping that chip stocks finally were bottoming out after the Philadelphia index plunged 36% this year, the most since 2008. They got a rude awakening after Samsung Electronics Co., the world’s largest memory-chip maker, and PC-processor maker Advanced Micro Devices Inc. reported results that suggested a deeper-than-feared slowdown ahead. 

“Weakened demand and supply-chain woes in the semiconductor sector may have already been priced in, but there is still a darkened outlook,” said Tina Teng, an analyst with CMC Markets. “Excess inventories and cooling demand may further slow down the sector’s growth.”

In a reversal of the pandemic-induced boom, chipmakers have had a tough time this year as rising prices and weaker economies hurt consumption and expand inventories. The industry is grappling with factors including aggressive monetary tightening by major central banks and Washington’s export restrictions on China, a top consumer of chips. 

In the latest move, the Biden administration announced on Friday new restrictions on China’s access to US chip technology, adding measures aimed at stopping Beijing’s push to develop its own chip industry and advance the country’s military capabilities. 

Semiconductor stocks are the most cyclical part of the technology world because of the boom-and-bust nature of chip demand. This year the industry has gone from a worldwide shortage of chips to a glut in a matter of months because of those headwinds. And recent tensions between the US and China and new investments in US manufacturing could worsen the imbalance in supply and demand, Teng said.

The latest selling is putting an abrupt end to a nascent rally in the sector, after Morgan Stanley said the cyclical downturn appears to be finally nearing a bottom. “We are not calling for the beginning of a new cycle but acknowledge that an inflection (bottom) is closer,” the investment bank’s analysts wrote in a note. 

The case for optimism has been that stock prices now fully reflect the slowdown. The Philadelphia index is priced at 14.5 times earnings, an 11% discount to its average multiple of 16.3 for the past decade, while the European index is at a 17% discount. 

Those averages, though, reflect one of the greatest bull markets in history, so it’s hard to argue chip shares are shockingly cheap. And the Asian index is right in line with its average price-earnings ratio.

This year’s declines have been widespread, with 28 of the 30 stocks in the Philadelphia index falling. The slump was preceded by annual gains averaging 50% for the benchmark between 2019-2021.

Among notable losers around the globe, Nvidia Corp., a staple of high-end gaming computers, has lost more than $400 billion in market value. Germany’s Infineon Technologies AG, which gets almost half its sales from the auto industry, is down 38% this year, while Chinese manufacturers Sanan Optoelectronics Co. and Will Semiconductor Co. have fallen by more than half.

Some investors are willing to start nibbling on the stocks now in anticipation of a turnaround.  

“I have started to buy some shares of tier-one foundries and suppliers of advanced manufacturing in steps, as the valuations of the leading companies is low,” said Alex Huang, manager of the Capital Hi-Tech Fund in Taipei. “But I will wait for a while to add holdings significantly, pending further checks on the utilization rate of companies and supply-demand for products like cellphones and servers.”

There’s a chance it’s still too soon. 

The inflection point probably won’t come until 2024, when inflation cools and appetite for chips recovers, said Richard Windsor, founder of independent researcher Radio Free Mobile. Even for memory-chip makers that have seen a sharp drop in demand, it’s “impossible to tell” when the bottom will arrive and how sharp that will be, he said.


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(Adds White House restrictions in paragraph 6.)

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