Why Semiconductor Stocks Are Poised to Rebound After Q4's Inflation Peak

The Federal Reserve's June 2025 projections make it clear: U.S. inflation, driven largely by tariff-induced price pass-through, is set to peak in the fourth quarter of this year. With core PCE inflation forecast to hit 3.6% year-over-year by December—a temporary spike tied to trade tensions—this creates a critical inflection point for investors. Once the data confirms the peak, the Fed is expected to pivot toward rate cuts, unlocking a powerful tailwind for semiconductor stocks like NVIDIA (NVDA), AMD (AMD), and the broader SMH ETF. Here's why the post-Q4 environment will be a golden opportunity for tech investors.

The Inflation Peak: Tariffs, Chips, and the Fed's Timeline

The U.S. economic forecast for 2025 highlights tariffs as the primary inflation driver. The baseline scenario assumes that core inflation, particularly in semiconductors, will hit 3.6% by Q4 due to elevated import costs from China and the EU. This is a temporary effect, as tariff-related price hikes are expected to fade once trade policies stabilize or reverse. The Fed's June projections already price in a 50-basis-point rate cut in Q4 2025, with the federal funds rate dropping to 4.0%–4.25%, as the central bank pivots to address the subsiding inflationary impulse.

Why Semiconductor Stocks Will Benefit

Semiconductor companies like NVIDIA and AMD have been hit hard by the dual pressures of slowing demand and rising input costs from tariffs. But this sets up a classic "buy the dip" scenario:

1. Cost Pass-Through Peaking: The worst of tariff-driven margin pressure is likely behind chipmakers. Once Q4 CPI data confirms the inflation peak, companies can stop hiking prices to offset costs, freeing up cash flow.
2. Fed Easing Boosts Valuations: Lower rates will reduce discount rates for future earnings, lifting the multiples of high-growth tech stocks. NVIDIA's forward P/E ratio, currently under pressure, could rebound sharply.
3. Demand Recovery: A Fed pivot often precedes a revival in consumer and business spending. Semiconductor-heavy sectors like AI infrastructure, gaming, and automotive tech will see renewed demand.

NVDA's resilience amid macro headwinds hints at its potential upside once the Fed cuts rates.

The Catalyst: Q4 CPI Data and the Fed's Move

The key trigger will be the December 2025 CPI report. If it shows inflation has indeed peaked, the Fed will cut rates as projected, sending a clear signal to markets. Semiconductor stocks, which are highly sensitive to interest rates, will likely rally.

• Short-Term Play: Overweight semiconductor ETFs like SMH ahead of the CPI drop. SMH, which includes NVDA, AMD, and Intel (INTC), has underperformed the broader market in 2025 but could see a sharp rebound once the Fed pivots.
• Long-Term Pick: NVIDIA (NVDA) remains the sector's crown jewel. Its AI-driven data center business, which accounts for over half its revenue, is poised to boom as enterprises invest in AI infrastructure post-rate cuts.

The SMH ETF's lagging performance sets up a strong recovery opportunity.

Risks to the Thesis

• Tariffs Stay Elevated: If trade tensions escalate further (e.g., new 25% tariffs on Chinese imports), inflation could stay stubbornly high, delaying the Fed's pivot.
• Economic Slowdown: A deeper-than-expected recession could dampen demand for semiconductors.

However, the Fed's baseline projections and the market's pricing of a Q4 rate cut suggest these risks are already discounted. The Fed's June statement emphasized that "uncertainty around inflation projections remains high," but the central bank's path is clear: cut rates once the peak is confirmed.

Investment Strategy: Buy the Dip, Hold for the Recovery

• Buy SMH now: Positioning in semiconductor ETFs ahead of Q4's CPI data allows investors to capture the rebound.
• Target NVDA at dips below $500/share: Its AI leadership and margin resilience make it a top pick for long-term growth.
• Avoid overexposure to legacy chipmakers: Intel (INTC) and others with weaker AI moats may underperform.

The combination of fading inflation, Fed easing, and pent-up demand for semiconductors creates a textbook setup for tech investors. The post-Q4 environment will be the proving ground for this trade—and semiconductor stocks are primed to lead the charge.

Final Call: Overweight SMH and NVDA ahead of Q4's inflation peak. The Fed's pivot is coming, and chips will shine.