Key Highlights

  • TSMC posted a 58% year-on-year profit increase, its fourth consecutive quarterly record, as AI chip demand accelerated.
  • ASML raised full-year guidance but failed to meet elevated investor expectations on equipment delivery volumes.
  • High-performance computing now accounts for 61% of TSMC revenue, up from 55% the prior quarter.
  • Advanced packaging has emerged as a supply chain bottleneck constraining further AI chip output growth.
  • Chipmaker equity valuations are compressing the margin for positive earnings surprises across the sector.

Who Are TSMC and ASML?

Taiwan Semiconductor Manufacturing (NYSE:TSM) is the world's largest contract chip manufacturer, producing advanced semiconductors for companies including Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), and AMD (NASDAQ: AMD). It does not design chips; it fabricates them to customer specifications, operating at technological nodes no competitor can match at scale. ASML Holding N.V. (NASDAQ: ASML), headquartered in the Netherlands, manufactures the extreme ultraviolet lithography machines essential to printing circuit patterns on chips at the most advanced dimensions. Each machine costs upward of $400 million, and ASML is the sole supplier globally. Together, the two companies form a critical artery in the global AI chip supply chain. Their earnings are closely watched as indicators of broader semiconductor sector health.

The Expectations Trap

In ordinary market conditions, a 58% increase in quarterly profit would be cause for investor confidence. For TSMC, it prompted a share price decline. The company delivered its fourth consecutive quarter of record earnings, with chips fabricated at seven nanometres and below accounting for roughly three-quarters of revenue. The market's response was indifferent, if not dismissive.

This is what happens when expectations become structurally decoupled from outcomes. Semiconductor stocks have been re-rated aggressively over the past two years on the back of AI infrastructure spending. The consequence is a valuation architecture that demands continuous outperformance, not merely strong performance. Meeting expectations, in this environment, is functionally equivalent to disappointing the market.

Chart 1 — TSM vs ASML vs NVDA. One-year relative price performance of TSM, ASML, and Nvidia (May 2025 to April 2026). All three stocks gained between 90% and 140%, reflecting aggressive sector re-rating driven by AI infrastructure demand. Source: TradingView.

TSMC's first-quarter profit grew 58% year-on-year, with high-performance computing rising to 61% of total revenue from 55% the prior quarter. Capital expenditure guidance for 2026 was set at $52 billion to $56 billion, up sharply from $40.5 billion in 2025. Over the past year, TSM, ASML, and Nvidia collectively gained between 90% and 140%, a rally that embedded expectations far ahead of any single quarter's results.

Demand Strength, Supply Ceiling

Underlying demand for AI semiconductors shows no meaningful deterioration. High-performance computing, encompassing chips for AI workloads, now constitutes the majority of TSMC's revenue mix and continues expanding as a proportion of the total. Gross margins rose to 66%, reflecting pricing leverage that only a company of TSMC's technological position can exercise over customers entirely dependent on its fabrication capabilities.

ASML reported solid first-quarter results and lifted forward guidance, yet its shares fell as much as 6.5% on results day before partially recovering. The company's challenge is not demand, it is production capacity. Its chief executive indicated the firm could ship 80 low-NA EUV systems in 2027, contingent on customer confirmation. Analysts had priced in 90. That modest gap was sufficient to weigh on sentiment, illustrating how thin the margin for disappointment has become.

Advanced Packaging: The Next Bottleneck

Beyond wafer fabrication, a secondary constraint is forming further along the supply chain. Advanced packaging, which integrates multiple chips into cohesive systems, is emerging as a binding limitation on AI chip output. TSMC's most advanced packaging process has been largely allocated to Nvidia. New facilities are under construction in Taiwan, with additional capacity planned for Arizona, but semiconductor infrastructure operates on multi-year timelines that cannot be compressed by capital alone.

Intel (NASDAQ: INTC) has positioned its own packaging capabilities as an alternative, attracting commitments from several large technology customers. Analysts do not anticipate Intel displacing TSMC as primary supplier in the near term. Its more realistic role is providing supplementary capacity relief for customers constrained by TSMC's fully allocated schedules.

A Bellwether for Earnings Season

TSMC guided for capital expenditure of $52 billion to $56 billion in 2026, a material step-up from the prior year. Revenue growth guidance was maintained above 30% annually. In an environment where investor positioning had drifted beyond that target, confirmation of existing guidance was read as insufficient. The pattern is not isolated. Nvidia's fourth-quarter report earlier this year produced a 5% share decline despite record results. The precedent is now established across the sector's largest names.

Chart 2 — SOX Philadelphia Semiconductor Index. Philadelphia Semiconductor Index (SOX), one-year performance (May 2025 to April 2026). The index more than doubled before the March 2026 selloff, underscoring the valuation premium built into the broader semiconductor sector ahead of earnings season. Source: TradingView.

As earnings season progresses through the semiconductor supply chain, the same dynamic is likely to recur. The Philadelphia Semiconductor Index reflects this dynamic starkly, having more than doubled over the past twelve months before the March selloff, leaving the sector with little valuation cushion heading into earnings season. The index tracks the world's largest chip companies, including TSMC, Nvidia, ASML, Intel, and AMD, and serves as the benchmark barometer for global semiconductor sector sentiment.

Valuation Reality Check

The fundamental case for AI-linked chip demand remains credible and intact. The risk, as this week demonstrated, lies not in the business but in the distance between where earnings are and where current multiples imply they must go. That gap is the variable most worth watching.

For long-term investors, the structural story around AI semiconductor infrastructure remains compelling. TSMC's manufacturing dominance, ASML's monopoly on advanced lithography equipment, and the relentless capital commitment from hyperscalers all point to sustained demand well beyond any single earnings cycle. The near-term volatility in share prices is less a verdict on the industry and more a consequence of how aggressively markets have already priced its future. In that context, the real question heading into the rest of 2026 is not whether demand holds, it almost certainly will, but whether valuations can find a level that allows strong results to once again be rewarded rather than merely absorbed.