TSMC's Beat Drives a Chip Rally: Is the Momentum Sustainable?

The immediate trigger for the chip rally is clear. TSMC's fourth-quarter results, announced this morning, delivered a powerful beat across the board. The company posted consolidated revenue of NT$1,046.09 billion and net income of NT$505.74 billion for the quarter, translating to $33.73 billion in revenue and $16.01 billion in net income. More importantly, net income surged 35.0% year-over-year, significantly outpacing analyst expectations. This strength was driven by robust demand for advanced chips, with 3-nanometer and 5-nanometer technologies accounting for 63% of total wafer revenue.

The market's reaction was swift and decisive. TSMC shares surged 5.76% in premarket trading to $345.98 on the news. This move suggests strong optimism is already priced in, as the stock is reacting to a beat that was likely anticipated given the AI boom. The real catalyst for the broader rally, however, may be the forward-looking guidance. Management pointed to continued strong demand for leading-edge process technologies and provided a bullish Q1 outlook, while also unveiling a massive capital plan. The company's 2026 capital budget is expected to be between US$52 billion and US$56 billion, a potential increase of up to 40% from prior levels. This aggressive expansion signals confidence in sustaining the current growth trajectory.

So, does this represent a fundamental shift or a temporary re-rating? The premarket surge indicates the latter-a strong re-rating based on a confirmed beat and optimistic forward guidance. The stock's move suggests the market has already digested the positive news, leaving the sustainability of the rally dependent on whether TSMC can consistently meet or exceed the high bar set by its own guidance.

The Ripple Effect: ASML's Record High and Sector Rally

The impact of TSMC's news rippled swiftly through the supply chain. The most direct beneficiary was ASML, the Dutch lithography equipment maker. Shares in ASML surged over 5%, hitting a record high and pushing its market capitalization past the $500 billion milestone. The stock even climbed as much as 7.6% at one point, extending its year-to-date gain to 25%. This move cemented ASML's status as Europe's most valuable company.

ASML's critical role makes it a key beneficiary of the AI chip supply chain. The company manufactures the world's most advanced lithography machines, which are critical tools for producing cutting-edge chips used in AI servers and high-performance computing. TSMC's own production of 3-nanometer and next-generation N2P chips relies heavily on ASML's extreme ultraviolet (EUV) technology. When TSMC reports strong demand and a bullish outlook, it directly signals robust future orders for ASML's machines.

This rally wasn't confined to ASML. The optimism spread across the sector, with European and U.S. semiconductor material & equipment stocks rising on Thursday. The move demonstrates how TSMC's results act as a leading indicator for the entire industry. Strong demand at the foundry level validates the entire ecosystem, from equipment suppliers to materials providers. The sector-wide pop suggests the market is pricing in a sustained period of capital expenditure and growth, at least for now.

Valuation and Risk: Assessing the Setup

The recent rally has pushed valuations higher, creating a setup where the risk of a pullback now hinges on execution. TSMC's own guidance provides a clear benchmark. Management is projecting a gross margin of 63.0%-65.0% for 2026, which sits above its actual fourth-quarter margin of 62.3%. This implies a path for continued profitability expansion, but it also sets a high bar. The stock's 10% year-to-date gain and its 5.76% premarket surge on the earnings beat suggest strong optimism is already priced in. The market is betting that TSMC can consistently deliver on this elevated trajectory.

The key vulnerability is valuation compression. The sector-wide rally, led by ASML's record highs, has lifted multiples across the board. If future guidance from TSMC or its peers fails to meet these newly elevated expectations, the premium valuations could unwind quickly. The risk is not a lack of demand, but a potential mismatch between that demand and the pace of execution or profitability growth. As the Q1 guidance range of $34.6-35.8 billion shows, the company is projecting another quarter of robust revenue, but any stumble in hitting that range would test the market's patience.

In short, the event-driven opportunity has shifted. The initial catalyst of a beat and bullish outlook has been digested. The next move depends on whether the company can walk the guidance tightrope. For now, the setup favors patience over panic, but the margin for error has narrowed.