AI Demand Boosts Chip Sector Outlook Despite Tariff Concerns

J.P. Morgan analysts forecast that the semiconductor industry will post in-line or slightly better second-quarter results, fueled by strong artificial intelligence (AI) demand, early signs of a cyclical recovery, and inventory pull-ins related to tariffs. However, the firm warns that trade tensions and potential new tariffs could dampen momentum in the second half of 2025.

Approximately 80-85% of semiconductor and semiconductor equipment companies covered by the bank saw earnings upgrades in Q1 2025, a sharp rise from 30-50% in previous years. This trend is expected to persist through Q2, supported by ongoing AI infrastructure investment.

J.P. Morgan emphasized the robust demand for accelerated computing, with cloud datacenter capital expenditures projected to grow 40% year-over-year. Chipmakers like Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), and Marvell Technology (NASDAQ:MRVL) are seen as major beneficiaries of the AI-driven upcycle.

Despite the optimism, analysts remain cautious, citing risks from tariff uncertainty and potential demand pull-forwards. Consumer-facing sectors such as smartphones and PCs may soften, while industrial and automotive segments are likely to show subdued cyclical recovery.

The bank favors companies tied to AI, chip design, and semiconductor equipment, highlighting names like KLA Corp (NASDAQ:KLAC) and Synopsys Inc (F:SNPS). While wafer fab equipment (WFE) spending is expected to remain flat this year, long-term growth is seen as supported by the rising complexity of chip manufacturing.

Analysts added that while markets appear complacent about trade risks, these could trigger a short-term pullback, potentially offsetting gains from positive industry cycles.

With AI demand shaping the next wave of growth, investors are advised to remain selective in chip stocks amid a shifting global trade landscape.