BofA Merrill Lynch's latest semiconductor industry outlook indicates that 2026 will mark a critical midpoint in AI infrastructure development, with global semiconductor sales expected to surpass the $1 trillion threshold for the first time, reaching $1.01 trillion—a 29% year-over-year increase.
According to analysts including Vivek Arya, while AI investment returns and hyperscaler cash flows face heightened scrutiny—potentially causing stock volatility—this effect will be offset by next-generation large language model developers and AI factories serving enterprise/government clients. The report forecasts near double-digit YoY growth for wafer fab equipment (WFE) sales in 2026.
With the AI investment race still in early-mid stages, BofA projects AI semiconductors will achieve over 50% YoY growth, driven by robust data center utilization, supply constraints, enterprise adoption, and competition among LLM developers, hyperscalers, and government clients.
**Semiconductor Equipment: The Unsung Hero of AI and Reshoring Trends** BofA expects equipment firms to outperform in 2026 as upstream beneficiaries of multiyear capacity expansions and tech upgrades fueled by AI infrastructure demand. Analysts anticipate upward revisions in H2 2024 and 2027 as capex plans and fab capacity timelines gain visibility.
Despite current valuation premiums, the report suggests the projected $150 billion WFE market by 2027 isn't fully priced in. BofA favors KLA and Lam Research for their growth potential across foundry/logic and memory segments.
Advanced packaging—now a sizable market—has grown sufficiently to impact major equipment players' growth trajectories. Over the past year, advanced packaging sales (HBM/logic) rose 22% among covered firms, roughly double overall WFE growth.
**Analog Semiconductors Remain Cautious; EDA Shows Catch-Up Potential** BofA maintains caution on analog semiconductors despite multiple EPS resets. Limited macro demand improvement, declining auto production amid slowing EV growth, and softening China demand suggest inventory restocking won't materialize before end-market recovery.
In EDA, Cadence and Synopsys offer high-quality, low-beta exposure to rising semiconductor complexity and resilient R&D spending. Both firms boast ~80% recurring revenue and ~1.4 beta—well below the coverage median of 1.9.
**Emerging Themes: Optics, Robotics, and Quantum Computing** BofA highlights three emerging 2026 themes: co-packaged optics (CPO), robotics, and quantum computing. CPO—a novel AI networking solution outperforming copper/interposers—is dominated by Broadcom, NVIDIA, and Marvell.
In robotics, potential White House policy support could benefit Teradyne's Universal Robots platform. Quantum computing, though niche, may disrupt traditional computing similarly to GPUs versus CPUs, with NVIDIA's CUDA-Q platform offering complementary exposure.
Overall, BofA maintains a constructive chip sector view, arguing consensus underestimates the mission-critical, offensive/defensive nature of capex investments by well-capitalized tech leaders despite ongoing debates about AI ROI.
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