Earnings season is winding down and semiconductors have gone up across the board, proving the point that the chip business is way ahead of the rest of the economy in an up-cycle that is accelerating.  Supplies are tight and demand is spreading out. Seasoned management teams point to incoming orders that outpace available capacity, new applications that are raising average selling prices and previous cost reductions that are already producing higher margins. Some are already reporting record profitability.  Besides big earnings, companies like Linear Technology ( LLTC - news - people ), Maxim Integrated Products ( MXIM - news - people ), Xilinx ( XLNX - news - people ), Intel ( INTC - news - people ) and Analog Devices ( ADI - news - people ) pay hefty dividends that are multiples of the risk-free rate. Their balance sheets are bulletproof.  Follow Intelligent Investing On Twitter.  Sign Up For The Daily Intelligent Investing Newsletter.  Earnings are rising so quickly that price-to-earnings ratios are just 12 to13 times what these companies will earn this year, with 30%-to-50% gains in store for 2011. With the economy just now gaining steam and central banks still accommodating, further expansion is possible for 2012.  Semiconductors remain cyclical but are now embarked on such steep growth trajectories that they are again growth stocks, rendering cyclical valuation schemes of the last half-dozen years irrelevant. Interest rates are at historic lows, but profit margins are nearing alltime highs and revenues are surging. P/Es should double. The market has yet to figure this out, so semis will continue to outperform.  The fiction that there's no growth now and none to come, which was perpetrated by Wall Street and Fleet Street this past year, has been brusquely cast aside. Intel and Apple ( AAPL - news - people ) just reported better than 20% year-over-year revenue gains with profits growth still higher. Recent industry trade statistics point to year-over-year growth rates that we last saw in the 1980s and 1990s. Semiconductor equipment makers such as Lam Research ( LAM - news - people ), KLA-Tencor ( KLAC - news - people ), ASML ( ASML - news - people ) and Novellus ( NVLS - news - people ) now speak of 50% revenue growth in 2010.  The TV pundits may change their minds twice a day, but the real world is steadier and now embarked on a multiyear expansion that very little can alter. There's rising demand for chips that present manufacturing capacity cannot provide. Investment dollars will continue to pour in, and the cycle will take another two years to run its course.
Chip stocks are good barometers for the overall economy and point to a quicker pace of growth ahead.