High Expectations Weigh on Chip Giants as TSMC and ASML Post Strong Earnings

The semiconductor industry is facing a paradox where record-breaking financial performance is no longer sufficient to drive stock prices higher. TSMC and ASML, the backbone of global chip production, both saw share price declines this week despite reporting strong first-quarter results and positive outlooks. This trend highlights a growing gap between fundamental growth and market expectations. As AI demand continues to surge, investors are now pricing in near-perfection, meaning results that merely meet or slightly exceed high targets are being met with sell-offs. This mirrors a recent pattern seen with Nvidia, where a blowout report previously triggered a price decline. TSMC reported a 58% surge in first-quarter profits, marking its fourth consecutive quarter of record gains. High-performance computing, driven by AI demand from clients like Nvidia, now accounts for 61% of its revenue. The company maintained a gross margin of 66%, supported by its dominance in advanced nodes of 7nm and below, which comprise 74% of total revenue. However, smartphone revenue dipped 11% compared to the previous quarter. ASML also raised its forward guidance, yet shares fell as the market reacted to delivery forecasts. The company projected it could deliver 80 low numerical aperture (NA) EUV machines in 2027, falling short of some analysts' hopes for 90 units. Additionally, concerns regarding sales to China continue to weigh on the Dutch equipment maker. Looking ahead, TSMC plans to increase capital expenditure to between $52 billion and $56 billion in 2026, up from $40.5 billion in 2025. Despite this aggressive expansion, bottlenecks in advanced packaging—specifically Chip on Wafer on Substrate (CoWoS)—remain a critical challenge for the industry's ability to scale AI capacity fast enough to meet demand.