Bank of America: US semiconductor sector may fall another 10%, but presents an "enhanced buy" opportunity; these 8 chip stocks are the top picks for buying on dips

According to Jinse Finance APP, just as NVIDIA (NVDA.US) is set to release its highly anticipated quarterly report after the market close on Wednesday, the Bank of America Securities analyst team led by Vivek Arya has delivered a "contradictory" bombshell to the market—the Philadelphia Semiconductor Index (SOX) still has about 10% downside risk in the short term, but this pullback is precisely an "enhanced buy" positioning window.

In a report to clients, Arya stated bluntly: "Although such downside risk is not justified from a fundamental perspective, SOX still faces about 10% downside risk, which would bring its valuation back to the discount level against the S&P 500 prior to the ChatGPT launch (November 2022)." However, "on the other side of the ledger, the situation is extremely attractive."

Four-fold Short-Term Pressure: Why Could Chip Stocks Fall Another 10%?

Bank of America listed four major short-term headwinds restraining the semiconductor sector:

First, rising interest rates. The U.S. 30-year Treasury yield briefly hit 5.33% this month, the highest since 2007. The climb in long-term yields is a systemic headwind for high-valuation growth stocks.

Second, the "not-in-my-backyard effect" for data centers. Community resistance to AI data center projects is intensifying across the United States. New York State has suspended approval for large data centers above 50MW, Pennsylvania has implemented the strictest regulations in the country, and Texas is conducting a comprehensive audit of data center grid access.

Third, concerns about "circular financing." The market has doubts about the open-ended financing models used by giants like NVIDIA to support their clients and suppliers, worrying this could dilute earnings quality and boost venture risk.

Fourth, crowded positioning. Institutional investors are overweight semiconductor stocks by 13% relative to the S&P 500, creating additional supply-side pressure.

If SOX falls another 10%, its forward P/E ratio will fall to about 20 times—on par with the S&P 500. Previously, the AI boom pushed the index valuation from a roughly 9% discount to a 15% premium over the S&P 500.

Eight “Enhanced Buy” Picks: An All-Star Lineup from NVIDIA to Intel

Despite short-term pressure, Bank of America has clearly identified the following eight semiconductor stocks as “enhanced buy opportunities”:

Arya emphasized that seasonal strength in Q4 and Q1 2027 will provide strong upward catalysts for these stocks.

NVIDIA’s “Crucial Battle”: The Buyback Narrative Beyond Earnings

For the soon-to-be-released NVIDIA earnings, Bank of America offers a more detailed analysis. Arya points out that NVIDIA faces two major downside risks: “capital returns could slow down” and “new enterprise business carries unstable and unpredictable sales.”

Bank of America believes NVIDIA could follow Apple’s model since 2012—raising its cash return ratio from the current 50% of free cash flow to over 75%, which is the "next catalyst" for share price revaluation. Bank of America estimates that NVIDIA will generate more than $400 billion in free cash flow between 2026 and 2027, roughly equal to Apple and Microsoft combined over the same period. Larger-scale share buybacks will “create more potential buyers and reduce market concerns over investment risk in the artificial intelligence ecosystem.”

Long-Term Narrative Unchanged: AI Data Centers to Hit $1.8 Trillion by 2030

Bank of America's long-term outlook remains firmly bullish. The bank’s latest forecast shows the global AI data center systems market will expand from about $564 billion in 2026 to about $1.8 trillion in 2030. Of this, AI servers will account for $1.4 trillion, networking equipment for $310 billion, and storage for $85 billion. The compound annual growth rate (CAGR) from 2025 to 2030 reaches as high as 45%.

Given that SOX index constituents are expanding at about a 70% annualized EPS growth rate, Arya believes the current forward P/E of around 20 times remains in the undervalued range.