Philadelphia Semiconductor Index Finally Rebounds After Eight Consecutive Declines! "AI Computing Power Surge" Drives Semiconductor Capacity Expansion, Morgan Stanley Outlines a $280 Billion Equipment Spending Blueprint

Title context: Philadelphia Semiconductor Index Finally Rebounds After Eight Consecutive Declines! "AI Computing Power Surge" Drives Semiconductor Capacity Expansion, Morgan Stanley Outlines a $280 Billion Equipment Spending Blueprint Text: On Monday, the U.S. stock market's semiconductor sector staged a major rebound after several consecutive days of declines. The Philadelphia Semiconductor Index, which covers the world's top chip giants such as NVIDIA Corporation, AMD, Intel Corporation, and Micron, surged about 3% in early U.S. trading. Almost at the same time that semiconductors began their counteroffensive on Monday, Wall Street financial giant Morgan Stanley released a research report on the further acceleration of semiconductor equipment spending, which added fuel to the semiconductor sector's phase of bottoming out and rebounding. It emphasized that the global semiconductor equipment supply chain, closely tied to global chip manufacturing capacityincluding lithography machines, etching, thin-film deposition, CMP, advanced packaging, and process yield monitoringis still expanding capacity for a larger AI investment cycle. According to market data, as of October 16, the Philadelphia Semiconductor Index had fallen for eight consecutive trading days, with a cumulative decline of about 15.7%; it fell 11.4% last week and was about 24% below its recent high, having entered technical bear market territory. The memory sector came under particularly obvious pressure, with U.S. memory chip manufacturing giant Micron's stock price plunging 14.6% last week. South Korea's KOSPI index, known as the "AI computing power trading bellwether," fell about 14.5% last week. Although it closed up 1.76% on Monday, it was still down about 15.6% in October. This round of adjustment has evolved from profit-taking at highs into a concentrated reassessment by the market of the sustainability of strong capital expenditure on AI computing power and the future ability to realize AI profits amid rising financing costs for AI infrastructure. In early trading on Monday, the market began to repair this sharp selloff. As of 21:37 Beijing time on October 19, the Philadelphia Semiconductor Index was up 2.88% at 11,458.24 points; based on historical closing data, it was still down about 9.3% in October and about 21.8% below its high, but still up 61.8% year to date. Opening trading data at 21:35 Beijing time showed ASML Holding NV ADR, Lam Research, and Applied Materials up 2.35%, 3.84%, and 3.74%, respectively, while Micron was up 3.92%. The coexistence of a deep phased decline and a large year-to-date gain means the market is reassessing just how much of the strong growth expectations previously priced into stocks can still be delivered. Morgan Stanley's October 19 report, "Semiconductor Capital Equipment: SEMICON West Recap," showed that it maintained an "In-Line" view on the North American semiconductor equipment industry and expects global wafer fab equipment spending (WFE) to reach $223 billion in 2027, up 37% year over year. The supply chain is strengthening its willingness to expand capacity and preparing for an optimistic 2028 scenario of $280 billion, but component shortages and customer cleanroom delays have already appeared. The research report also focused on three main themes: Applied Materials' entry into process control, MKS and Advanced Energy addressing supply bottlenecks, and advanced packaging increasing the value of testing. It supports the judgment that equipment demand remains resilient and also indicates that the next round of global semiconductor industry earnings upgrades requires more solid evidence of actual deliveries. In terms of specific positioning, MKS (MKSI.US) and Advanced Energy (AEIS.US), which received relatively positive feedback in this Morgan Stanley semiconductor equipment industry exchange, are both rated "Overweight"; KLA (KLAC.US), Lam Research (LRCX.US), and Onto Innovation (ONTO.US) are also rated "Overweight." Applied Materials (AMAT.US), Camtek (CAMT.US), Nova (NVMI.US), and Teradyne (TER.US) are rated "Equal-weight." As the Philadelphia Semiconductor Index rebounded on Monday after a deep decline, Morgan Stanley's latest survey can be said to provide strong industry support for the long-term growth prospects and bullish tone of semiconductor equipment and even the entire semiconductor sector: AI-related equipment demand remains strong, and the supply chain is stepping up capacity expansion to prepare for a larger-scale investment cycle. As growth drivers shift further from raising existing capacity utilization to ramping new capacity, the key to earnings realization in the next stage lies in whether equipment suppliers' capacity expansion, key component supply, and customer wafer fab construction can advance in sync, converting strong demand into revenue delivered on schedule. The $223 Billion Growth Must Pass the "Delivery Test": Semiconductor Equipment Capacity Expansion Linked to AI Computing Power Enters a More Difficult Phase Growth in 2026 mainly comes from raising existing capacity utilization, while 2027 must rely on ramping new capacity. Morgan Stanley's analyst team pointed out that the industry's annualized run rate rises from about $125 billion in the fourth quarter of 2025 to about $200 billion in the fourth quarter of 2026; the $200 billion here is a quarterly annualized run rate and cannot be directly treated as full-year spending. Entering 2027, even achieving the base-case forecast of $223 billion will require suppliers to build and release new capacity. Morgan Stanley said that major sub-suppliers mentioned in discussions that Applied Materials plans to double capacity by 2028, and more companies worry that falling behind in expansion will cause orders to go to competitors, so they are willing to commit resources for the optimistic 2028 scenario of $280 billion. This shows that the industry is still allocating capital for growth, but equipment manufacturing, personnel training, and supplier certification will make growth realization more complicated. Real constraints have already appeared simultaneously on the equipment manufacturing side and the wafer fab receiving side. Morgan Stanley's research report showed that PCB suppliers are prioritizing AI customer demand, squeezing supply quotas for equipment subsystem manufacturers; another DRAM customer delayed equipment delivery from the December quarter to the March quarter of the following year because its cleanroom was not ready. Such delays first affect equipment revenue recognition and the timing of wafer capacity release. At the same time, Morgan Stanley said that North American semiconductor equipment supplier MKS stated that about 95% of supplier supply situations need not be worried about, while the remaining 5% require focused management; some competitors are ramping more slowly, and customers have already asked MKS to increase supply of dual-sourced products. Both MKS and Advanced Energy increased inventory of potentially scarce components in advance, which Morgan Stanley viewed positively. The investment implication behind this is that a small number of components can hold up complete-system deliveries, so supply chain execution can market share. Valuation adjustments have also changed the conditions required for gains. Morgan Stanley's 2026 forecasts had previously been revised up by a cumulative 26%, and the market gradually became accustomed to continuous beats; now, the valuations of some equipment stocks based on the firm's strong 2027 earnings forecasts are already close to cycle-trough levels, reflecting that investors have begun to doubt whether the 2028 boom can continue. Morgan Stanley said the conference strengthened the credibility of supply chain capacity expansion but did not provide enough new evidence to confirm 2028 earnings. Combined with the current market environment, if the strong rebound trajectory of semiconductor equipment stocks and even the global semiconductor sector is to continue, cloud investment returns and financing capacity need to achieve a new expansion path against a sustained and stable backdrop, and further manifest as customers receiving equipment on schedule and equipment makers realizing revenue and cash flow. These links determine how much of the strong demand can ultimately be converted into shareholder returns. The More Expensive the AI Chip, the More Valuable the Yield: Inspection and Test Equipment Compete for New Value U.S.-headquartered semiconductor equipment giant Applied Materials is increasing investment in front-end optical wafer inspection and materials metrology, and trying to extend its electron-beam advantages and new optical products into advanced packaging. Morgan Stanley recognizes its logic for challenging KLA's front-end leadership: Applied Materials' process control business grew more than 50% this year, higher than the firm's estimate of about 25% for KLA; however, this only puts the former slightly above its 2022 peak, and more sustained growth is needed to prove share gains. Morgan Stanley said industry disputes over advanced packaging technology and market share direction are greater: ONTO believes Applied Materials may be overestimating the market opportunity, while Nova emphasizes that metrology equipment priced at millions of dollars per unit, with limited customer configurations, must win orders through performance and total cost of use. KLA's advanced packaging revenue will not exceed $1 billion until 2026, and Applied Materials would need to capture significant share to reach the same scale. Advanced packaging expansion brings opportunities, but the throughput, sensitivity, and customer validation capabilities of different inspection technologies determine how much revenue each company can capture. Changes in the testing segment are more structural. The report cited Teradyne's "test earlier" framework, which runs testing through wafers, post-dicing bare dies, interposers and substrates, post-dicing devices, final test, and system-level test, with the goal of detecting defects at the earliest economically viable stage. The underlying reason is that when compute dies, HBM, and advanced packaging capacity are all scarce, a defective die entering expensive packaging may simultaneously waste multiple high-value resources and reduce deliverable products that cannot be quickly replaced. Testing also handles parameter trimming, fuse programming, and product binning, so it directly affects whether chips can be sold. Morgan Stanley expects testing spending as a proportion of WFE to rise from 5.8% in 20202024 to 8.5% in 2026; it recognizes the value increase while asking how much more testing intensity can rise. The most investment-relevant change for semiconductor equipment here is that testing begins to protect the efficiency with which scarce capacity is converted into revenue. That is, test equipment improves the delivery capacity of qualified chips by screening out defects in advance and reducing waste of high-value components and scarce packaging capacity, thereby safeguarding revenue realization. By identifying defects earlier, it reduces waste of expensive chips and scarce packaging capacity, allowing limited production resources to ultimately produce more sellable qualified products. For example, screening out defective compute dies in advance can prevent problems from being exposed only after they have completed expensive packaging with qualified HBM, which would cause other components and packaging inputs to be lost as well. When capacity is tight, such losses also mean fewer products delivered and less revenue recognized, so customers are more willing to invest funds in effective testing.