U.S. chip stocks may need to drop another 15%? JP Morgan: Under the impact of tariffs, a new round of "earnings downgrade cycle" has begun

In the past two months, the chip sector has accumulated about 25%, and investors originally expected to catch a breath during the earnings announcement season, but JP Morgan believes it may not have hit the bottom yet.

On April 17, JP Morgan released a research report stating that although the overall Q1 performance of chip stocks was decent, tariffs are coming, and valuations need to be revised downwards, making the second half of this year more challenging.

JP Morgan analysts Harlan Sur and his team pointed out that most chip companies' Q1 performance will meet expectations, or even be slightly better. However, starting from Q2, management may become more conservative or even pessimistic when issuing earnings guidance, because Trump's tariffs and global trade tensions have already led chip companies' customers to start cutting orders or delaying purchases.

More importantly, if companies begin to lower future earnings forecasts in the next two to three earnings quarters, the overall forward-looking EPS expectations for the industry may face a 15%-25% downward revision, which would trigger a new round of "negative earnings expectation revision cycle," and the entire chip sector may drop another 10% to 15% in the coming months.

Q1 is relatively stable, but difficult to sustain after Q2

Sur pointed out that this rhythm is actually very similar to the trade friction period in 2018. At that time, the EPS expectations for the chip industry were cut by about 20-25% over 2 to 3 quarters, and the chip index fell by one-third from its peak in just 3 to 5 months, with the market bottom gradually emerging. Although the market has partially priced in pessimistic expectations, the downward revision of valuations and expectations has not yet reached the bottom.

The sensitivity of the chip industry to the economy is akin to that of canaries in coal mines. JP Morgan pointed out that the most vulnerable are consumer chips. Historical experience shows that tariffs and trade disputes often significantly undermine the demand for consumer products, such as smartphones, PCs, automobiles, and industrial sectors. These areas are particularly sensitive to price; once consumer confidence declines, purchasing desire will plummet, leading to order cuts for chip manufacturers, inventory buildup, and naturally shrinking profits.

For example, in the smartphone market, although JP Morgan expects Q1 performance to meet or slightly exceed expectations, it is mainly due to 'pre-pulling of goods' before the tariffs were implemented, and demand is expected to decline in the second half of the year, with June quarter guidance likely to meet expectations or be lower.

Additionally, the recovery pace of the automotive and industrial chip markets is now disrupted by tariffs. JP Morgan noted that the possibility of a 25% tariff on automobiles has already caused automakers and tier-one suppliers to slow down production plans. Other countries are also cutting back on industrial manufacturing activities, and demand in these two markets is expected to continue to weaken in the second half of this year and even into 2026.

The new round of tariff policies will have the most direct impact on chip companies with factories in the U.S., such as Intel, Texas Instruments, Qorvo, and Skyworks. Although these companies have global supply chain networks, rising domestic manufacturing costs will immediately reveal profit pressures, especially under the dual pressure of tariffs on exports and countermeasures on procurement, making it difficult to fully offset profitabilityJP Morgan has lowered its revenue growth forecast for the global semiconductor industry in 2025 from a previous year-on-year increase of 10%-12% to "flat year-on-year to mid-single-digit growth." Among them, the chip equipment market is facing even greater chill, as JP Morgan has adjusted its growth forecast for the semiconductor equipment (WFE) industry in 2025 from the original +5% to 0% or slight negative growth. In the context where chip manufacturers are unwilling to expand production and dare not invest in new factories, equipment orders are the first to be impacted.

Although the entire industry is under pressure, chip design software companies (EDA) are performing more stably. For instance, companies like Synopsys (SNPS) and Cadence are tied to the R&D budgets of chip manufacturers, and R&D spending typically does not see significant cuts even in a poor market. JP Morgan cited that during the trade war in 2018, EDA companies' stock prices averaged only a 20% drop, while the entire semiconductor sector fell by 30%-35%.

AI Remains a Highlight

Despite the overall industry valuation being revised downwards, JP Morgan emphasizes that AI and data center-related companies are still the most investment-worthy segments at present. These companies either have deep layouts in custom chips, AI infrastructure, and high-speed network equipment, or are positioned in the midstream of the value chain, showing strong resilience. These companies are less dependent on the consumer end, and compared to price-sensitive terminals like PCs, mobile phones, and home appliances, AI and data center clients have stronger payment capabilities and are more resilient.

JP Morgan expects that capital expenditure for cloud computing data centers will grow by 40% year-on-year in 2025, especially in AI servers, 800G/1.6T network equipment, and optical communication modules, which will continue to drive growth. Companies like NVIDIA, Broadcom, and Marvell are expected to show good resilience in a generally sluggish industry environment due to their leading positions in AI and high-speed networking.

Even so, the AI sector is not a completely safe haven, as GPU giants like NVIDIA and AMD still face potential risks such as export restrictions and tariff disruptions. While AI is strong, it also depends on which part of the chain one stands on.

However, JP Morgan pointed out in its report that despite the semiconductor industry facing tariff and cyclical challenges, in the long term, semiconductor stocks (including equipment and EDA tool companies) have significantly outperformed the S&P 500 and NASDAQ in annualized returns over 3, 5, 10, 15, and even 20 years. This is due to the critical role of semiconductors in the technology value chain and the dividends and structural profitability improvements brought about by the continuously growing chip content in various applications.

Additionally, in the current context of high macroeconomic and geopolitical uncertainty, JP Morgan advises investors to adopt a more cautious strategy, focusing on companies that are strongly related to AI/accelerated computing (such as Broadcom, MRVL, ADI), as well as value chain participants that benefit from leading chip advancements, such as EDA software companies (SNPS) And semiconductor equipment manufacturer (KLAC)