JPMorgan Sees Recent AI Selloff as a Setup for Semiconductor Sector Upswing

The semiconductor sector has taken a hit recently, with AI-linked stocks facing a notable pullback. The KOSPI index, heavily influenced by memory chip companies, dropped about 25% from its highs, and the Philadelphia Semiconductor Index has slid roughly 20%. Major players like Micron Technology, Inc. (MU) have suffered declines between 20% and 50% from their recent peaks.

Yet, JPMorgan's (JPM) strategists believe this selloff doesn't point to a long-term slump. Their research points out that while individual AI-focused stocks have fallen hard, the broader MSCI World index remains snugly within 1-2% of its record levels, indicating the market isn't collapsing as a whole.

Digging into fundamentals, JPMorgan highlights a notable disconnect between semiconductor stock prices and their earnings projections. Despite semiconductor relative prices weakening, earnings forecasts over the next 12 months have been climbing, particularly in Europe's semiconductor space. This divergence hints that investors may have overreacted.

On the charts, technical indicators appear supportive of a bottom. The Semiconductor Index's Relative Strength Index (RSI) is nearing oversold territory, while previous elevated positioning indicators from the tech rally have eased substantially, a sign technical pressures might be lifting.

JPMorgan's tech analysts underscore the ongoing tightness in DRAM and NAND supply, expecting this shortage to last through 2028. Demand fueled by AI applications, server infrastructure needs, and rising prioritization of high-bandwidth memory are all factors constraining supply. DRAM prices have held firm despite stock declines, and projected revenue growth from $143 billion in 2025 to over $1.2 trillion in 2028 underscores this tight market.

Adding fuel to the optimism, recent second-quarter earnings from companies like TSM show strong order momentum and encouraging capacity expansion plans for 2027. These developments suggest the semiconductor industry could sustain solid financial performance in upcoming quarters.

In their sector stance, JPMorgan has put an overweight rating on semiconductors, seeing value in the current price correction. While the stock rout shook confidence recently, the bank's outlook leans on fundamental durability and technical setups hinting at potential stabilization.

All eyes now turn toward the unfolding Q2 earnings season and supply-demand balance in memory chips. The landscape is shifting, but is this the calm before a rebound or simply a pause before the next leg down? Time and results will tell.