Semiconductors are — along with oil and other physical commodities — the lifeblood of the 21st-century economy. Computer chips power smartphones, the cloud, the Internet of Things (IoT), video games, artificial intelligence (AI), and other hypergrowth industries that have been the key drivers of stock market returns for the last few decades.

One company in particular dominates semiconductor production: Taiwan Semiconductor Manufacturing (TSM 0.17%). Investors around the globe follow the chipmaker (known as TSMC for short) closely because of how important its business is to other businesses and economies. Its influence spans from China to Europe to North America.

Image source: Getty Images.

A few days ago, Taiwan Semiconductor Manufacturing gave an update to investors that indicates a slowdown is coming to the semiconductor market. But what does that mean for the global economy and the stock market? Is a recession coming? Let’s investigate. 

TSMC’s weak revenue in March

Every month, TSMC updates investors on its revenue from the prior month. So in early April, we all got an update on how the business performed in March. And the results were quite disappointing.

Last month, TSMC generated revenue of 145.4 billion in New Taiwan dollars ($4.76 billion), down 11% from February and 15% from the same month a year earlier. Over the first three months of 2023, revenue grew 3.6% year over year, meaning customer demand for its computer chips slowed down quickly in March.

Even if March was somewhat of an anomaly, single-digit revenue growth is a huge slowdown from the last few years at TSMC, when revenue was growing 20% or higher every quarter.

TSM revenue (quarterly YoY growth) data by YCharts. YoY = year over year.

Downstream effects could be massive

TSMC’s customer list is massive and includes tech titans like Apple, Nvidia, AMD, and Sony. So when it sees slowing demand, that means its customers project their businesses to slow down as well. We are already seeing articles about it, with a research firm estimating that Apple’s Mac shipments fell 40% in the first quarter of 2023.

This could have a major impact on the global economy over the next few years if demand for things like smartphones and cloud computing slows down considerably. It could signal a global recession is coming or has already arrived, especially for the tech-heavy market in the United States.

It is impossible to predict exactly how it would affect the stock market, but with many major companies in indexes like the S&P 500 relying on semiconductors to power their operations these days, there could be some major downside in stocks if this trend with TSMC continues.

There’s no need to panic

Yes, a slowing semiconductor industry could mean some short-term declines in the stock market. But so what? Drawdowns are a regular occurrence with stocks, and you should not be surprised when they occur.

Since 1980, 22 of the last 42 years have seen stocks decline by more than 10% at one point during the calendar year. So that means it is essentially a 50/50 chance that stocks will fall by double digits every year you are in the market. Yet, the stock market generally goes up the longer you stay invested. Volatility is just the price of growing your nest egg.

There’s no need to panic and sell your stocks when the headlines tell you a recession or stock market crash is coming. Embrace the uncertainty and invest with a mind-set to build your wealth over the long term instead.