AI Chip Stocks See Turnaround After Slump? JPMorgan Says Pullback May Be Entry Opportunity, Semiconductor Fundamentals Remain Strong

TradingKey - Recently, the AI value chain has undergone a notable correction, with the semiconductor sector under particularly clear pressure. Dragged down by memory chip stocks, South Korea's KOSPI index has fallen about 25% from its recent peak, while the Philadelphia Semiconductor Index (SOX), which tracks the global chip industry, has also dropped about 20% cumulatively.

However, JPMorgan ( JPM) does not believe this correction means the AI rally is over. The bank's strategy team believes that the current market looks more like capital reallocation and valuation digestion rather than a deterioration in industry fundamentals. As earnings expectations continue to improve and market positioning recedes, chip stocks may be gathering momentum for the next rally.

Stock Prices and Earnings Diverge, Semiconductor Sector May Be Undervalued

A team of JPMorgan Chase & Co. strategists led by Mislav Matejka noted in their latest report that the recent sharp selloff in AI chip stocks has led to a clear divergence between share performance and corporate earnings trends.

Over the past few months, growing market concerns over AI overinvestment and peaking chip demand have driven investors to trim their semiconductor exposure. Meanwhile, industry earnings expectations have not deteriorated in tandem, and future profit forecasts for some semiconductor companies continue to be revised upward.

JPMorgan specifically pointed out that the situation is particularly pronounced among European semiconductor companies. While weakening market sentiment has weighed on stock prices, analysts' future earnings expectations for these companies continue to show an improving trend, and their stock performance has even lagged the broader market.

The bank believes that current chip stock prices have already partially priced in market worries over a slowdown in the AI cycle, but actual fundamentals remain supportive; therefore, the current pullback may instead present a reallocation opportunity.

JPMorgan stated: "The gap between chip stock prices and earnings expectations is widening." Without a clear weakening in earnings growth, the market is pricing in expectations of increased supply and slowing demand in advance, potentially underestimating the duration of the AI infrastructure investment cycle.

AI Computing Power Demand Remains Strong, Storage Cycle May Continue Until 2028

The core logic supporting JPMorgan's bullish stance on the semiconductor industry remains driven by demand for AI infrastructure.

The bank believes that as the scale of artificial intelligence model training continues to expand and large cloud service providers steadily increase their data center investments, demand for AI servers will maintain high growth. In particular, high-bandwidth memory (HBM), as a crucial supporting product for AI accelerators, remains in short supply.

For the memory industry, JPMorgan believes that the tight supply and demand in the DRAM and NAND markets will not ease quickly, and a meaningful release of new supply may not occur on a large scale until around 2028.

This suggests that the market's recent concerns over an "imminent reversal of the chip cycle" may be premature.

Despite the recent weakness in memory stocks, DRAM prices remain at high levels, indicating that industry demand has not experienced a significant collapse. JPMorgan expects that major global memory manufacturers are still poised to maintain revenue growth over the next few years.

Meanwhile, capital expenditure by hyperscalers remains a vital support for the semiconductor industry. If Microsoft ( MSFT ), Google ( GOOGL ), Amazon ( AMZN) and other companies continue to expand their AI data center investments, chip demand will remain resilient.

Q2 Earnings Season May Be Catalyst for Chip Stock Rebound

As the market awaits the next directional choice, the upcoming second-quarter earnings season could become an important catalyst.

JPMorgan believes that the quarterly results recently released by TSMC have already sent positive signals. The report shows that demand for AI-related orders remains robust, and the company remains optimistic about its future capacity planning, proving that the semiconductor industry's fundamentals remain supported.

If Nvidia ( NVDA ), TSMC ( TSM ), SK Hynix, Micron ( MU) and other core supply chain companies continue to confirm strong AI demand in their earnings reports, market confidence in the sustainability of the industry's growth may be further restored.