The semiconductor sector is bracing for a shakeup, and JPMorgan’s Harlan Sur isn't mincing words. "Expect in-line results but tariff/trade related dynamics to drive weaker 2Q/2H25 and negative earnings revision cycle." That's Wall Street-speak for buckle up – it's about to get bumpy.
Tariff Troubles: A 15-25% EPS Trim Ahead?
As first-quarter earnings begin to roll in, Sur says the Street should prepare for a "kick off negative earnings revision cycle," with forward EPS estimates potentially being slashed by 15-25% over the next few quarters. Investors hoping that semi stocks had already hit bottom after a ~25% tariff-driven slump may be in for another jolt – Sur sees another 10-15% downside from here.
But this isn't just about numbers. The broader concern is about confidence, or lack thereof. "Rapidly changing tariff headlines are negatively impacting consumer and business confidence," Sur notes, with turn business — which can make up 20-30% of guidance – now at risk due to reduced visibility. Add in China's latest tariff volley against U.S.-fabricated chips, and names like Intel Corp (NASDAQ:INTC), Texas Instruments Inc (NASDAQ:TXN), Qorvo Inc (NASDAQ:QRVO), and Skyworks Solutions Inc (NASDAQ:SWKS) suddenly look exposed.
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AI And Datacenter: The Only Bright Spots
That said, JPMorgan isn't throwing out the entire chip basket. Sur urges a "selective" approach, spotlighting Broadcom Inc (NASDAQ:AVGO), Marvell Technologies Inc (NASDAQ:MRVL) and Analog Devices Inc. (NASDAQ:ADI) as top picks – all tied closely to AI and data infrastructure. These are the companies best positioned to ride the "strong demand in accelerated compute/AI," even if GPU giants like Nvidia Corp (NASDAQ:NVDA) and Advanced Micro Devices Inc (NASDAQ:AMD) face potential downside from tightening China restrictions and "upcoming AI diffusion rules."
EDA, Semicap: Downturn-Proof Darlings
In the tools-of-the-trade corner, KLA Corp (NASDAQ:KLAC) and Synopsys Inc (NASDAQ:SNPS) also earn JPM's stamp of approval. EDA players like Synopsys are seen as resilient. "R&D budgets don't get cut in downturns," Sur says, a mantra every long-term investor in chip design software should pin to their monitors.
Meanwhile, the "flat-to-down" outlook for WFE (wafer fab equipment) in 2025 spells more caution for semicap names, though JPMorgan still favors Applied Materials Inc (NASDAQ:AMAT), KLA Corp, and Lam Research Corp (NASDAQ:LRCX) – all expected to outperform thanks to "rising capital intensity" and growing service revenue.
The Down-Cycle Playbook Moment Is Here
The macro backdrop remains fraught. JPM economists now peg the chance of a U.S. recession at 60%, as the tariff storm clouds hang heavy. Demand pull-forward in smartphones might make the first quarter look fine, but "incremental conservatism" is expected to dominate the second quarter and H2 guidance.
Bottom line?
This is a "down-cycle playbook" moment. The sector's long-term structural story — AI, content tailwinds, and rising chip complexity — remains intact. But for now, it's all about threading the needle between "inevitable slowdown" and the pockets of AI-driven strength.
And as Sur says, "remain selective on stocks."
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