By Barbara Kollmeyer

Highly regarded analysts say it's too early to call a top for chips

The semiconductor top is not in, as hyperscalers, for one, can't stop spending, says Nomura.

Given the blistering 80%-plus gain for the PHLX Semiconductor Index SOX in the second quarter, investors have understandably been wondering if a cycle top is nearing.

Nope, says a crack team of Nomura analysts who dazzled some on social media with a 119-page deep dive into the sector that was published Tuesday. They see the chip run continuing for a couple of reasons: that the go-big-or-go-home hyperscalers can't stop spending in 2027, partly due to rising memory-chip costs, and that data-center building plans have ramped up.

Calling the recent chip pullback "healthy," a team led by Normura's head of Taiwan equity research, Aaron Jeng, cautioned that the market hasn't even dealt with some of the risks and shortages to come. They list those as "the likely biggest-ever component supply mismatch"; free-cash-flow issues for hyperscalers next year; execution on lots of "cutting-edge technologies" to show up beyond 2027; and, lastly, "macro risks related to a yield uptrend."

First and foremost, they said, the new factories being built by chip makers to cope with high demand from artificial-intelligence hyperscalers will take about two years, keeping capacity constrained at least over 2027. They add that wafer-on-substrate and other small components could become a bigger bottleneck next year.

While Taiwan Semiconductor (TW:2330) has "turned aggressive" with its plans for what's called chip-on-wafer-on-substrate packaging - a critical process that helps high-performing AI chips function - it doesn't actually control the substrate base that the chips sit on, they noted. Instead it relies on smaller suppliers, and that is creating a bottleneck that few are seeing right now. That leads them to believe Taiwan Semiconductor won't hit its packaging output goal for next year.

Just looking at that, they expect "profound implications" for companies that sell chips to run AI and those building their own.

They expect an "unprecedented" component-supply mismatch in the second half of the year that will get worse next year.

The imbalances could "further deteriorate" from a ramp-up of Nvidia's (NVDA) next-generation Vera Rubin platform and Amazon's (AMZN) in-house Trainium 3 chips in the latter half of this year.

"This could further affect the supply chain for non-AI subsectors such as consumer and auto, in our view. Also supply chain price hikes could continue or increase with worsening shortages, we think," said the Nomura team.

While the industry is set for shortages, Nomura sees a much stronger market ahead for servers, the team observed. It expects global server revenue growth of 74% in 2026 - up from year-over-year growth of 43% previously - and then 65% in 2027. The analysts noted that neocloud companies are buying up any hardware that Big Tech is passing up, keeping demand strong.

As for the stocks they like on this supply-chain battleground, they start with TSMC and include ASE Technology Holding (TW:3711), Aspeed Technology (TW:5274), MediaTek (TW:2454), GlobalWafers (TW:6488), King Yuan Electronics (TW:2449), Elite Material (TW:2383) and Zhen Ding Technology (TW:4958).

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are pushing further into negative territory, with the dollarDXY rising, silver (SI00) falling and crude (CL.1) lower.

Key asset performance Last 5d 1m YTD 1y S&P 500 7499.36 1.82% -1.45% 9.55% 21.00% Nasdaq Composite 26,213.72 2.45% -3.25% 12.79% 29.75% 10-year Treasury 4.471 8.00 -2.90 29.90 18.70 Gold 3997 -0.48% -10.44% -7.74% 18.65% Oil 68.76 -1.59% -28.52% 19.77% 1.82% Data: MarketWatch. Treasury yields change expressed in basis points

The buzz

ADP private-sector payrolls rose by 98,000 in June, which was less than forecast. Still to come, the Institute for Supply Management's manufacturing index and data on construction spending at 10 a.m.

Fed Chairman Kevin Warsh will appear on a panel along with other central bankers such as European Central Bank President Christine Lagarde at 9 a.m. Eastern in Sintra, Portugal. Investors are eager to hear more about Warsh's inflation-fighting views.

Meta shares (META) are climbing on a report it's building an AI cloud unit to sell extra AI compute.

U.S. restrictions were lifted on Anthropic's powerful AI model ahead of its big IPO.

Nike's stock (NKE) is falling after the sports-gear maker beat earnings estimates but sales fell.

Shutterstock shares (SSTK) are sinking after Getty Images (GETY) said it will cancel merger plans due to U.K. regulatory hurdles.

Intuitive Machines shares (LUNR) are up after the space group won a contract worth up to $148.3 million to deliver a moon lander for NASA.

General Mills stock (GIS) is up after the cereal and packaged-goods maker posted better-than-forecast profit.

Kroger (KR) has reached a deal to buy food and pharmacy retailer Giant Eagle for $1.65 billion in cash and assumed debt.

Klarna (KLAR) said a ruling has awarded it $1.97 billion in damages and accrued interest in an antitrust case brought by its PriceRunner price-comparison search engine against Google.

In San Francisco, even $180,000 tech salaries aren't enough.

The chart

A team of Deutsche Bank strategists led by Binky Chadha share this chart showing second-quarter S&P 500 earnings-growth expectations at 26.2%, double the prior record going into an earnings season outside of recession recoveries. That's after first-quarter growth of 25.2%, the highest in four years and strongest in two decades, they said. Driving second-quarter expectations: semis, megacap growth and tech, and a "stepping up" of the rest of the S&P 500. They see scope for stocks to move higher over the medium term.

Top tickers

These were the most searched tickers on MarketWatch as of 6 a.m.:

Ticker Security name SPCX SpaceX NVDA Nvidia MU Micron TSLA Tesla TSM Taiwan Semiconductor Manufacturing INFY Infosys AMD Advanced Micro Devices MSFT Microsoft PLTR Palantir GME GameStop

-Barbara Kollmeyer

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