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Nvidia CEO Jensen Huang speaks at an event in Taipei, Taiwan, on June 2, 2024.Key Takeaways
Semiconductor stocks could be set to rebound in the fourth quarter as seasonal headwinds ease, according to Bank of America Securities analysts.
Chip stocks have had a tough start to the third quarter, amid heightened volatility and concerns about the economy.
Larger chipmakers such as Nvidia with greater exposure to the data-center market could be in a stronger position to gain, the Bank of America analysts argue.
Semiconductor stocks could be set for a rebound in the fourth quarter as seasonal headwinds ease, according to Bank of America Securities analysts.
Chipmakers have had a tough start to the third quarter amid heightened volatility, with recent jobs data raising concerns about the U.S. economy and shifting expectations for rate cuts by the Federal Reserve.
The iShares Semiconductor ETF (SOXX) has lost nearly 14% in the calendar third quarter so far, while the S&P 500 is down about 2%. However, even with recent losses, the exchange-traded fund focused on chip stocks is up more than 11% since the start of the year, while the S&P 500 has climbed a little over 12% in the same period.
The SOX semiconductor index gained about 0.7% on Monday but has lost 13% since the start of the third quarter.
Historically Weak Period for Markets and Chip Stocks
“If history is any guide, SOX could recover starting in October,” the analysts said, with the calendar fourth and first quarters bringing average returns between 7% and 10.5% since 2010, about 400 basis points above the S&P 500.
Semiconductor stocks may not be alone in being poised to emerge from a seasonally difficult period, with August and September historically among the weakest months for the S&P 500 more broadly, while November and December are some of the strongest.
Bank of America warned that elections in the U.S. and geopolitical tensions could raise uncertainty later in the year, though historical data also suggests markets have tended to rise in presidential election years.
Nvidia, Broadcom Among BofA's Top Picks
The analysts said that larger chipmakers with greater exposure to the data-center market, such as Nvidia (NVDA) and Broadcom (AVGO), would be in a stronger position, in their base case, with cloud computing giants including Microsoft (MSFT) and Amazon (AMZN) set to raise spending on infrastructure.
Nvidia, Broadcom, and KLA (KLAC) were Bank of America’s top semiconductor stock picks overall, citing “consistent execution in their respective sub-sectors.”
Nvidia partners Arm Holdings (ARM), Micron Technology (MU), and Onsemi (ON) could also be particularly well-positioned to benefit from a stronger-than-expected resurgence, based on their potential ability to scale sales quickly if demand rises faster than anticipated, the analysts said.
However, if demand ends up proving weaker than expected, analysts highlighted Broadcom, Synopsys (SNPS), and Cadence Design Systems (CDNS), among other chip stocks, based on historical performance.
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