Why the iShares Semiconductor ETF (SOXX) Jumped 23% in May

May was another strong month for the semiconductor sector as chip stocks continued to rally on impressive earnings reports, excitement over the SpaceX IPO, and continued signs of shortages in components like memory chips.

Additionally, CPU stocks soared as it became clear that the shift to inference would drive surging demand for CPUs, leading to another bottleneck in semiconductors.

The gains across the industry were strong enough that it sent the iShares Semiconductor ETF (NASDAQ: SOXX) up 23% for the month. As you can see from the chart below, the gains came in two stages.

SOXX data by YCharts

Why the SOXX soared

The top holdings on the SOXX have changed quickly as the momentum in the chip sector has shifted from Nvidia to newer bottlenecks in memory and CPUs.

As of June 3, the top holdings on the ETF were Micron, followed by Advanced Micro Devices and Marvell, which jumped early in June after Nvidia CEO Jensen Huang called in the next trillion-dollar chip stock.

Micron stock nearly doubled last year, driven by ongoing reports of a shortage in memory, which some expect to last through at least 2029. At an investor conference in May, management said that its financial outlook had improved since its last earnings report, a sign that it will likely beat estimates when it reports earnings later this month. A price target hike to $1,650 from UBS also sent Micron surging, as it showed the growth potential in memory.

AMD was another big winner last month, gaining 45% after it popped early in the month on a strong earnings report, and then followed the broader gains in chip stocks in the second half of the month. AMD's revenue in the first quarter rose 38% to $10.3 billion, and adjusted net income was up 45% to $2.27 billion. Both numbers beat expectations, and its guidance topped estimates as well.

Image source: Getty Images.

What's next for semiconductor stocks

Chip stocks have gone parabolic since the start of April, as the chart below shows, and that could put pressure on future gains.

SOXX data by YCharts

On Thursday, the SOXX fell 6% as Broadcom's earnings report sent chip stocks sliding. While the industry leader beat estimates, investors sold the stock off as management acknowledged that Google would diversify away from its custom chips, and its AI chip sales for the third quarter were projected to be $16 billion, below expectations at $17.2 billion.

Still, if competition and diversification are to blame for that, it shouldn't be a problem for the broader chip sector. If the overall narrative in the semiconductor sector remains positive, then the SOXX should keep moving higher.

Jeremy Bowman has positions in Advanced Micro Devices, Broadcom, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Marvell Technology, Micron Technology, Nvidia, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.