The US chip stocks have experienced a rough start in July, with the Philadelphia Semiconductor index shedding over 11% since hitting a record high in June. Despite this, the index is still up 83% this year, sparking discussions about what comes next for these firms. The massive profit growth enjoyed by these companies, thanks to rising prices and supply-demand imbalances, has led to questions about the longevity of the AI capex boom.

Market Analysis

Analysts generally expect hyperscaler capex spending to remain high, with much of the anxiety about these stocks driven by what-if scenarios involving stock declines and capex cuts. The global cloud and AI infrastructure capital expenditure is expected to approach $1.5 trillion by 2027, a 40% to 50% jump year-over-year.

US brokerages have bumped up their price targets, driven by expectations that insatiable AI demand will support earnings growth. Among the S&P 500 chipmakers, Micron has the highest expected upside, reflecting its current price vis-à-vis its consensus analyst target, of more than 60%. Memory chipmaker Sandisk’s shares are expected to rise over 30%, based on LSEG data.

Challenges Ahead

However, the growth is seen moderating in 2027, with profits expected to rise 46.1%, according to LSEG-compiled data. Uncertainty about the US interest rate path and the Middle East conflict could also cast a shadow on earnings estimates. The valuations of these companies have gotten cheaper over the last two years, primarily due to earnings growing faster than the price.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.