Signals from chip manufacturers' Q2 reports: Demand is stronger than three months ago, price increases begin to "spread"

J.P. Morgan believes the Q2 earnings of the global semiconductor supply chain have just sent out an extremely bullish signal: industry demand is even stronger than three months ago, and pricing power is substantively “spreading upstream.”

According to Chaser Trading Desk, J.P. Morgan systematically reviewed the core signals from global leading chipmakers’ earnings for April-June 2026 in a research report on August 17. The conclusions were highly consistent and clear: the intensity of demand has completely surpassed expectations from three months ago, and the uptrend in prices is accelerating from memory chips to semiconductor production equipment (SPE) and materials.

The report states that the key change in logic is that price increases and profit expansion are no longer exclusive to memory chip manufacturers; semiconductor production equipment (SPE) and tech materials suppliers are steadily lifting gross margins through price hikes. Driven by strong demand, wafer fabrication giants like TSMC and Intel are comprehensively raising capital expenditures (Capex); equipment manufacturers have sharply upgraded market expectations for wafer fab equipment (WFE); and memory giants are locking in base profits for the coming years ahead of time with long-term agreements (LTAs) spanning up to 5 years and substantial prepayments, guaranteeing their future profitability.

Chip Giants Raise Capex Across the Board, Accelerating Advanced Capacity Expansion

Driven by strong demand, major global chipmakers are intensively ramping up Capex plans, with funds mainly flowing into higher-cost front-end equipment, and back-end equipment demand is steadily rising as well.

• TSMC: Will raise its CY2026 Capex plan by about 15%, from $52-56 billion up to $60-64 billion (a 52% year-on-year surge at the midpoint). 70-80% of the funds will go to advanced process technology. Management made it clear they're working closely with SPE manufacturers to ensure equipment supply does not become a capacity bottleneck.

• Intel: Will raise their CY2026 Capex plan from flat YoY (~$18 billion) to $20 billion (up 11% YoY), with equipment Capex jumping 40% YoY, and expects further significant growth in CY2027. Funds will mainly be invested in US-based front-end equipment, with increased back-end equipment investment related to EMIB-T. The 18A node will enter mass production by end-2026, 14A is targeted for risk production in H2 2027 with mass production in 2028.

• SK Hynix & Samsung: SK Hynix announced a CY2026 Capex plan of KRW 40 trillion (up 45% YoY), advancing the M15X ramp-up, and the Yongin Fab 1 cleanroom will start operations in early 2027. For Samsung Foundry, Taylor Fab 1 is on schedule to launch in 2026 and gradually ramp 2nm capacity, while Taylor Fab 2 construction will begin this year with mass production in 2030.

Semiconductor Equipment (SPE) Market Expectations Upgraded Sharply, Price Increases Drive Gross Margins Higher

Compared to three months ago, visibility on the WFE market outlook has further improved. J.P. Morgan believes equipment vendors not only see a bigger market but, more importantly, are successfully passing on costs and raising gross margins via “value-based pricing” (i.e., price increases).

WFE Market Size Expecations Raised Across the Board: Tokyo Electron lifted their WFE market outlook for CY2026-27 from $150-170 billion to at least $150 billion for CY2026 and at least $190 billion for CY2027.

Lam Research and KLA both raised CY2026 expectations to the lower bound of the $150 billion range. SCREEN Holdings took their CY2026 outlook (mainly for memory chips) up by over 20% YoY (at least $140 billion).

AI-Driven Equipment Demand Density Increasing: Lam Research noted that as semiconductors’ share of AI infrastructure rises, the WFE demand estimate per $10 billion AI investment has been raised from about $800 million to $900 million - $1 billion.

Gross Margin Expansion (Key Profit Signal):

• Tokyo Electron expects that, through pricing and other measures, gross margin could reach 50% by early fiscal 2027 (47% in Apr-Jun 2026).

• Lam Research saw Q2 gross margin reach 52% (50% in Q1), targeting 55% via high value-added products.

• Applied Materials (AMAT) raised gross margin by about 300 basis points in the past three years, mainly thanks to value pricing. Its Semiconductor Systems division’s gross margin surpassed 55%.

• KLA plans to improve pricing with more value-added new products, expecting profitability to rise heading into 2027.

J.P. Morgan believes the continued upward revision in WFE market outlook, combined with substantial improvements in equipment vendors’ gross margins, means the profitability flexibility of the semiconductor equipment industry is being systematically underestimated.

Indium Phosphide (InP) Substrate Supply-Demand Gap Exceeds 30%, Capacity Expansion and LTAs in Play

In the technology materials field, indium phosphide (InP) substrates are in extreme short supply, with suppliers aggressively expanding production and shifting towards larger 6-inch wafers.

• Supply-Demand Severely Unbalanced: Lumentum and Coherent both say demand is stronger than ever. Lumentum notes the current supply-demand gap is over 30%. As InP substrate supply is the main bottleneck, both firms have signed LTAs with AXT.

• Multiplicative Capacity Expansion: JX Advanced Metals plans to expand InP substrate output 7-10x by 2030. AXT’s goal is to triple capacity by the end of 2026 (quarterly sales reaching $60 million), and more than double it YoY by the end of 2027 (over $130 million).

• Technology & Cost Optimization: Coherent is shifting to 6-inch substrates, which can quadruple output vs. 3-inch, halve costs, and keep high yields. AXT has also made major progress on the technically demanding 6-inch wafer development.

Memory Chip LTAs Revealed, Prepayments Lock in Profits for Years

Global memory chipmakers are gradually disclosing details of long-term agreements (LTAs). J.P. Morgan believes these contracts are not only long in duration but involve massive prepayments, greatly reducing price volatility risk and providing core support for the re-rating of memory giants’ valuations.

• Samsung Electronics: Has finalized 5 LTAs with data center clients, with 5 more at the final negotiation stage. The deals are rolling 5-year contracts and are expected to involve large prepayments.

• SK Hynix: Has signed 10 contracts, each for 5 years with prepayments, aimed at reducing price volatility via these agreements.

• SanDisk: Has signed 8 contracts (including 3 with US hyperscale cloud providers), averaging 4 years (maximum 5 years), and customers have already inquired about contracts longer than 5 years. These contracts are typically prepaid and cover 50% of bit demand in FY27 and about two-thirds for FY28.

• Stunning Profit Baseline: SanDisk management revealed that even at the floor price under the variable pricing structure (cap and floor), gross margin can still reach around 80%.

The report points out that the accelerated rollout of LTAs provides a "floor" for memory chip makers’ profitability. SanDisk’s disclosure that “floor price corresponds to around 80% gross margin” is especially crucial, meaning even in the most pessimistic pricing situation, profitability still has strong support. As more LTA details are released, the re-rating logic for the memory chip sector is expected to be gradually recognized by the market.