Semiconductors could start recovering in October, BofA says

Semiconductor stocks have been volatile in recent weeks and while some on Wall Street think the turbulence could last through the election, Bank of America believes a recovery could happen sooner than that.

“Volatility could persist through NVDA earnings and then into Sep, historically the worst month for SOX, down 70% of the time. US elections and ongoing geopolitical tensions add an extra layer of uncertainty,” analyst Vivek Arya wrote in an investor note. “However, if history is any guide, SOX could recover starting in October, with CQ4 and CQ1 the two strongest quarters for semi stock performance (7-10.5% avg. returns, 400bps+ ahead of SPX, since 2010).”

Nvidia is slated to report its quarterly results after the close of trading on August 28. A consensus of analysts expects the company will earn $0.64 per share on $28.54B in revenue.

Arya added that the semiconductor industry is only in the fourth quarter of an upcycle, with the Philadelphia Semiconductor Index (SOX) having generated a return of 28%. Previous upcycles have lasted 10 quarters and generated an average return of 67% for the index.

The firm said that if the chip industry returns to its baseline rebound scenario, then Nvidia, Broadcom (NASDAQ:AVGO) and KLA Corp. (KLAC) would likely be three stocks that would outperform. If volatility stays elevated and demand was to decline, Broadcom, Cadence Design Systems (CDNS) and Synopsys (SNPS) would be likely outperformers, the research firm said.

On the other hand, if there is a resurgence, then stocks like Arm (NASDAQ:ARM), Micron (MU) and On Semiconductor (ON) would be outperformers, Arya said.