Chip industry set for strong Q2 earnings, but 2H tariff risks loom

J.P. Morgan analysts anticipate in-line to slightly better second-quarter semiconductor results, fueled by strong AI demand and early cyclical recovery, noting 80-85% of covered companies saw positive earnings revisions in Q1 2025. However, the bank maintains a cautious outlook for the second half of 2025, citing potential headwinds from trade tensions, new tariffs, and demand pull-forward effects, which could particularly impact consumer and automotive segments. While favoring AI-leveraged firms like Broadcom and Nvidia, J.P. Morgan warns of a potential market pullback as tariff risks, currently underestimated by the market, may offset positive cyclical trends.

Analysis

J.P. Morgan analysts project the semiconductor industry will report in-line to slightly improved second-quarter 2025 results, primarily driven by sustained strong demand in Artificial Intelligence and accelerated computing. This short-term optimism is supported by a projected 40% year-over-year growth in cloud datacenter capex for 2025 and a significant increase in positive earnings revisions, with 80-85% of covered semiconductor and equipment companies seeing upward revisions in Q1 2025, compared to 30-50% in 2023-2024. Companies directly leveraged to this AI infrastructure build-out, including Broadcom, Marvell, and Nvidia, are identified as key beneficiaries. However, this positive near-term outlook is tempered by significant caution for the second half of 2025. J.P. Morgan warns of potential headwinds from geopolitical trade tensions, the risk of new tariffs, and the effects of demand being pulled forward. The bank suggests the market appears complacent regarding these tariff risks, which could offset the positive cyclical recovery trends. Weaker demand is anticipated in consumer-facing markets such as smartphones and PCs, alongside a muted recovery in the industrial and automotive sectors. Consequently, the firm remains selective, favoring AI-leveraged stocks as well as names in semiconductor equipment and chip design software like KLA Corp and Synopsys, even while forecasting flat wafer fab equipment (WFE) spending for 2025.

Key Decisions for Investors

• Consider maintaining or increasing exposure to semiconductor companies with significant leverage to the AI infrastructure build-out, such as Broadcom (AVGO), Marvell (MRVL), and Nvidia (NVDA), which are directly positioned to benefit from strong datacenter capex growth.
• Investors should closely monitor geopolitical trade dynamics and news on potential tariffs, as these factors represent a key risk for the second half of 2025 that J.P. Morgan believes is currently underappreciated by the market.
• Adopt a selective strategy, potentially underweighting firms with high exposure to consumer end-markets like PCs and smartphones, which are expected to face softer demand, in favor of those in AI, semiconductor equipment, and chip design software.
• For long-term investors in semiconductor capital equipment, the forecast of flat wafer fab equipment spending in 2025 suggests near-term consolidation, but the underlying driver of increased manufacturing complexity remains a positive secular trend.