Tech & AI
Bank of America says chip stocks now trade at a discount to the market
Bank of America analyst Vivek Arya says chipmakers now trade below the S&P 500 on expected earnings. That reverses the premium they carried through the AI boom, and doubts over AI spending are growing.
Quick Read
- Bank of America's Vivek Arya says chip stocks now trade below the S&P 500 on expected earnings, after carrying a premium during the AI boom.
- Chip stocks fell sharply from their June 22 peak, but the S&P 500 lost far less, a split the bank says it has not seen in earlier chip downturns.
- Arya ties the risk to AI spending: a cut in 2027 cloud budgets could hit chipmaker profits harder than their sales.
- Nvidia's quarterly results on Nov. 17 are the next scheduled read on AI chip demand.
How cheap are chip stocks now?
The PHLX Semiconductor Index trades at 13.7 times the profits analysts expect over the coming year, Bank of America analyst Vivek Arya said in a note shared Friday.
Why it matters: That ratio, called a forward price-to-earnings multiple, shows what buyers pay for each dollar of expected profit. The S&P 500 trades at 17.7 times, the note said.
During the AI boom, chip stocks cost more than the market on that measure, according to Arya. Now they cost less. The Invesco PHLX Semiconductor ETF (Nasdaq: SOXQ), a fund that trades like a single stock, tracks the index.
Why did chip stocks fall while the market held up?
The chip index peaked on June 22 and fell sharply through Thursday's close, Bank of America said. The S&P 500 lost far less over the same stretch.
That split has no match in the earlier chip downturns the bank tracks. In those, the S&P 500 fell along with chipmakers.
The worry is AI spending. Bank of America says analysts' average forecast for 2027 cloud spending sits well above today's pace. Arya said a 20% cut in 2027 cloud spending would mean an earnings hit of 35% to 40% or more for AI chipmakers.
Did Friday's bounce change the picture?
Chip shares rallied on Friday. Advanced Micro Devices (Nasdaq: AMD) rose 11.0%, Nvidia (Nasdaq: NVDA) gained 2.8%, and Broadcom (Nasdaq: AVGO) rose 0.7%.
Arya argued the low price already reflects doubt. "Overall, today's discount already embeds sizable cycle skepticism," he said in the note.
He also said a cheap price may not be enough. In his view, confidence may not return until actual earnings cuts arrive, which he sees starting in the first quarter of 2027.
What comes next?
What’s next: The open question is whether AI customers keep spending. Nvidia's quarterly results on Nov. 17 may show part of the answer.
Bank of America's baseline case has a bottom in the first quarter of 2027. In that case, the note names Lam Research, Nvidia, Broadcom, Micron Technology, and Texas Instruments among the leaders.
For readers
What it could mean for you: If you own a technology or semiconductor fund, this story touches your money more directly than it would through an S&P 500 fund. A chip fund holds mostly the companies in Arya's note, with little outside the industry to offset them. A lower valuation could cushion further declines, or it may reflect earnings cuts that have not shown up yet. Arya sees those cuts beginning in the first quarter of 2027, and Nvidia's results on Nov. 17 could shift that view either way.
Questions and answers
Are chip stocks cheaper than the S&P 500?
Yes, on expected earnings, according to Bank of America analyst Vivek Arya. In a note shared Friday, he said the PHLX Semiconductor Index trades below the S&P 500 on that measure, after holding a premium during the AI boom.
Why did semiconductor stocks fall?
Arya points to doubts about AI spending. Bank of America says forecasts for 2027 cloud spending sit well above the current pace, and a cut could hit chipmaker earnings harder than their sales.
When could chip earnings cuts start?
Arya sees earnings cuts starting in the first quarter of 2027. He said confidence may not return until investors see those cuts.
The numbers
| Broadcom (AVGO) price | $293.69 |
|---|---|
| Broadcom (AVGO) change | +0.74% |
| Broadcom (AVGO) market value | $1.4 trillion |
| Broadcom (AVGO) 52-week high | $481.57 |
| Advanced Micro Devices (AMD) price | $449.04 |
| Advanced Micro Devices (AMD) change | +11.04% |
| Advanced Micro Devices (AMD) market value | $730 billion |
| Advanced Micro Devices (AMD) 52-week high | $649.42 |
| S&P 500 change | +0.31% |
| 10-year Treasury yield | 4.86% |
Friday’s close
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Not investment advice.
