US chip stocks enter "profit downgrade cycle"? JP Morgan has a pessimistic outlook on earnings season and picks out these "resilient stocks"

In the lead-up to the earnings season, JPMorgan believes that the market continues to underestimate the expected/inevitable global demand slowdown driven by U.S. tariff-related developments, and remains selective on stocks, favoring Broadcom Inc. (AVGO.US), Marvell Technology, Inc. (MRVL.US), Analog Devices, Inc. (ADI.US), KLA Corporation (KLAC.US), and Synopsys, Inc. (SNPS.US), all of which are given a "neutral" rating. Among small-cap semiconductor stocks, JPMorgan prefers MACOM Technology (MTSI.US) and Astera Labs (ALAB.US) as they are related to infrastructure and AI/data center spending, and they are also given a "neutral" rating. JPMorgan expects the first quarter earnings season to kick off a negative earnings revision cycle, with 12-month earnings per share estimates for the next two to three quarters potentially being lowered by 15-25%. The bank believes this will help with the bottoming process for semiconductor industry stocks. Since tariff concerns have emerged, semiconductor stocks have already fallen about 25%, and JPMorgan believes there is a possibility of a further 10-15% decline in the coming months. JPMorgan generally expects companies to provide results that are in line with or slightly better than expectations, but anticipates that executives will take a more conservative stance on guidance for the second quarter and will provide a very cautious outlook for the second half of the year. JPMorgan anticipates a pull in demand in the first half of the year before prices rise, which may lead to potential upside risks in earnings per share in the first half of the year; however, this will only accentuate the downside risks for lower earnings per share expectations in the second half of the year. JPMorgan stated that previous tariff trade-related dynamics have led to widespread and potential significant demand disruptions (industrial production downturn, automotive production downturn, more conservative customer buying patterns). In addition, the rapidly changing tariff news has negatively impacted consumer and business confidence. The bank believes that the prevailing uncertainty is leading to reduced visibility for companies, especially in cases where turnover businesses account for 20-30% of their revenue guidance. Recently, China announced tariffs on semiconductors manufactured in the U.S., which will affect companies with more manufacturing in the U.S., but JPMorgan expects these companies to adjust their supply chain networks to mitigate some of the impact. JPMorgan analyzed the patterns and outcomes of the 2018 U.S.-China trade/tariff war and is using it as a reference for the current environment (e.g., stock prices falling by 30-35% from the peak in December 2018, full-year earnings per share estimates being lowered by about 20-25% over a period of 2-3 quarters, stock prices bottoming out in three to five months). JPMorgan expects companies with more exposure to AI/data center/infrastructure spending to better sustain growth compared to companies with greater price elasticity in consumer end markets (personal computers, smartphones, automobiles, and industrial sectors). In this context, JPMorgan now expects the semiconductor industry's revenue to remain flat to grow by 5% year-on-year (previously forecasted growth of 10%-12%), and anticipates that the upcoming EPS revisions will help reduce some risks to a certain extent. For semiconductor equipment, JPMorgan predicts a weakening in fundamentals in the second half of the year, with semiconductor wafer fab equipment (WFE) industry revenue likely to remain flat to decline by 5% year-on-year (previously forecasted growth of 5%). JPMorgan believes that the EDA (chip design software) market should be more resilient, as it leverages semiconductor research and development spending and typically does not decrease even during economic downturns. Key Points JPMorgan anticipates a weakening of semiconductor fundamentals driven by tariff/trade-related dynamics, partially offset by the continued strength in artificial intelligence/data centers. Due to escalating trade tensions and potential significant economic disruptions, JPMorgan economists predict a 60% likelihood of a U.S./global economic recession, with the baseline forecast for a U.S. economic recession in the second half of this year. Therefore, while current semiconductor trends remain in double-digit year-on-year growth, JPMorgan believes that tariff impacts may put pressure on end demand and semiconductor fundamentals in the second half of 2025. JPMorgan points out that there is a higher risk of demand disruption in end markets with higher price elasticity, particularly consumer-facing end products (such as personal computers, smartphones, and consumer electronics), compared to end markets with lower price sensitivity (such as server/AI expenditure). In terms of long-term trends, JPMorgan believes that the fundamental background in the areas of artificial intelligence cloud data centers and ASICs remains constructive. JPMorgan notes that overall industry bookings remained stable in the first quarter, but a deterioration is expected in the second and third quarters of this year, marking the start of a negative earnings revision cycle. Overall, JPMorgan expects first-quarter performance (revenue, profit margins, earnings per share) to meet or slightly exceed expectations, but anticipates that companies will provide guidance for the second quarter that is lower than general expectations. JPMorgan believes that the prevailing uncertainty is leading to reduced visibility for companies, especially in cases where turnover businesses account for 20-30% of their revenue guidance. However, JPMorgan does see continued strong demand for accelerated computing/artificial intelligence. The demand for artificial intelligence/accelerated computing remains strong; the best position to address challenging macroeconomic environments. JPMorgan recommends paying more attention to companies related to ASICs and networks (Broadcom Inc./Marvell Technology, Inc.), as commercial GPUs (NVIDIA Corporation(NVDA.US)/AMD(AMD.US)), due to recent tariff poliRisks of strategy, there may be more downside risks to EPS. With the company continuously expanding its artificial intelligence infrastructure, the demand trend for artificial intelligence/accelerated computing remains strong. Despite macroeconomic fluctuations, JP Morgan's quarterly company checks and summaries of OFC conferences indicate that the growth prospects for GPU/XPU remain strong, as well as attracting strong demand for 800Gbps and 1.6Tbps network and optical/copper ports shipments (in the second half of this year).JP Morgan expects that by 2025, cloud computing capital expenditure will grow at an annual growth rate of 40%; and predicts that demand for Blackwell will remain tight, exceeding supply for most of the next 25 years. In terms of AI ASIC chips, JP Morgan continues to see strong expansion in customer adoption/design by Broadcom Inc., while Marvell Technology, Inc. remains optimistic about the prospect of annual growth rate for the next two years. AI calculations will also require significant high-speed networking capabilities, which are strong leadership areas for Broadcom Inc. (switch/router), Marvell Technology, Inc. (optical connectivity), AsteraLabs (computing connectivity), and MACOM Technology (network connectivity). The fundamentals of the smartphone industry largely follow demand development, but it is expected that the fundamentals of the second quarter and the second half of the year will trend conservatively, as consumer purchasing power weakens due to economic uncertainty. JP Morgan expects the first quarter performance of smartphone business companies to be in line with or slightly better than expected, driven by demand, as consumers may upgrade their devices earlier. However, due to recent hesitation in consumer momentum due to tariffs, and considering macroeconomic uncertainty, guidance for the second quarter may be in line with or slightly lower than expected. JP Morgan expects companies to take a cautious stance on the fundamentals of the second half of the year, as there is pre-positioned demand (which is more challenging in the second half of the year) and considering the expectation of tariff uncertainty and weak consumer purchasing power, companies will become more conservative.