US Stocks Rally as TSMC Earnings Renew Faith in AI Trade

TSMC (TW:2330) delivered a strong fourth-quarter earnings report, with net income reaching NT$505 billion ($16 billion), a 35% year-on-year increase. The results exceeded analyst expectations, which had been set around NT$470 billion. The company's revenue surpassed the NT$1 trillion mark ($33.1 billion), driven by demand for high-performance computing chips.

TSMC also raised its capital expenditure (capex) guidance for 2026. Previously expected to be around $48-50 billion, the company now anticipates spending $52-56 billion. The increased spending includes major commitments in the U.S. and Taiwan.

The stock responded positively to the earnings release, with TSMC's U.S.-listed shares (TSM) jumping more than 6% in pre-market trading. The rally extended to the broader tech sector, with suppliers like Applied Materials (AMAT) and Lam Research (LRCX) also seeing gains.

Why Did This Happen?

TSMC's guidance for 2026 reflects confidence in the AI sector's growth. The company cited strong demand for 3nm and 5nm chips, which are critical for AI applications. Analysts noted that TSMC's aggressive capex plans indicate a belief in a durable runway for AI demand.

The company's gross margin hit 62.3%, up from previous periods. TSMC attributed this improvement to cost-cutting measures and favorable foreign exchange rates. The results signal that TSMC is well-positioned to benefit from the ongoing AI investment wave.

How Did Markets React?

The market response was enthusiastic. TSMC's U.S.-listed shares surged, while the broader Nasdaq Composite and the Magnificent Seven ETF also saw gains. The Philadelphia Semiconductor Index (SOX) and ASML (ASML) shares also advanced.

Institutional investors and analysts expressed optimism about the AI sector. Matt Britzman of Hargreaves Lansdown stated that TSMC's results are a "roadmap for where the next leg of AI investment is headed." JPMorgan's tech team also anticipated continued gains for TSMC.

The rally was not limited to TSMC. Chip-equipment makers like Applied Materials and Lam Research also saw significant gains, as investors anticipated higher demand for manufacturing tools.

What Are Analysts Watching Next?

Despite the positive results, analysts remain cautious. Trade tensions, particularly around potential tariffs, could impact TSMC's expansion plans. TSMC's U.S. expansion is a key focus, with a $100 billion investment plan already announced.

The AI sector's sustainability is also under scrutiny. Goldman Sachs warned that some of the tailwinds driving recent growth are fading. While AI spending is expected to remain strong, the pace of growth is likely to slow in 2026.

Investors are also watching for further guidance from the Federal Reserve. The central bank's stance on interest rates could influence tech sector valuations. With tech stocks trading at high multiples, any policy shift could impact investor sentiment.

TSMC's strong performance highlights the broader trend of increased investment in AI infrastructure. However, investors are advised to monitor potential risks, including geopolitical tensions and supply chain disruptions.

In summary, TSMC's fourth-quarter results and 2026 guidance have bolstered confidence in the AI sector. The company's aggressive capex plans and strong financial performance are seen as positive signals. Analysts, however, caution that the market should remain vigilant about external risks that could impact the AI investment cycle.