As we delve into the economic landscape of the American semiconductor sector in 2024, the exuberance surrounding artificial intelligence (AI) has remarkably propelled the share prices of AI chip manufacturers like NvidiaThis surge has invigorated the entire semiconductor industry as evidenced by the nearly 30% hike in the sector’s stock prices this year aloneThe bullish trajectory that started in 2023 has unmistakably positioned chip stocks as the underpinning of the ongoing bull market in U.Sequities.

Looking ahead to 2025, a report spearheaded by analysts at Bank of America, particularly those under the astute leadership of Alia, outlines a buoyant outlook for chip stocksFollowing a sell-off at the commencement of the earnings season, American chip stocks have regained favor among global investors, and they are expected to attract further capital inflows in 2025. This could very well set the stage for a fresh wave of upward momentum in stock prices akin to the robust growth experienced recently.

The current semiconductor boom is still in its early days

Alia notes that overall sales within the semiconductor market are forecasted to soar, building on a strong growth trajectory from 2024, with a projected increase of around 15% reaching a staggering $725 billion by 2025. While this represents a slight deceleration from the anticipated 20% growth of the current year, the forecast remains exceedingly strong and resilient.

Typically, the demand cycle for semiconductors lasts about 2.5 years, followed by a downturn that can stretch up to one yearAs it stands, we are situated precisely at the midpoint of the current upswing that began in the fourth quarter of 2023. Expectations for 2025 include a notable 20% year-over-year increase in the sales of memory chips, building on a remarkable growth of 79% in 2024. The core semiconductor market, excluding memory chips, is projected to grow by 13%, largely fueled by strong performances in data centers

The report also suggests that while some sectors, such as consumer electronics, electric vehicles, and industrial chips may face a slight slowdown, the decline will be substantially mitigated compared to 2024.

This optimistic forecast resonates with the recent semiconductor market size projections released by the World Semiconductor Trade Statistics organization (WSTS). In its autumn forecast, WSTS raised its predictions significantly, projecting a 19% increase in the global semiconductor market in 2024, amounting to $627 billion, and an additional 11.2% growth in 2025, bringing the overall market to approximately $697 billion.

According to WSTS, this growth trajectory is predominantly driven by storage chip categories and AI logic chipsAmid the unprecedented AI boom, sales in memory chips like DRAM and NAND are anticipated to grow over 13%, while AI logic chips, including CPUs and GPUs, are expected to witness sales growth exceeding 16%. Other chip markets will also see single-digit growth rates, showcasing the broad-based nature of this ascent.

In the first half of 2025, AI chips are expected to maintain their lead, while the latter half will shift the spotlight toward less-explored sectors, notably automotive and industrial semiconductors

With this backdrop established, Bank of America envisions continued gains for U.Schip stocks, particularly as stakeholders amplify investments in AI training and model expansion, bolstered by major cloud computing clients refining their deployments of AI GPUs built on Nvidia’s Blackwell architecture.

The report reveals an intriguing dual trend, suggesting that while AI chip stocks are likely to maintain their momentum and potentially peak in the first half of 2025, concerns about a possible slowdown in AI chip revenues during 2026 will start to surfaceAs the global economy recovers and automotive production ramps back up, chips from the automotive and industrial sectors—traditionally overshadowed—are poised for a revival, attracting investor interest.

On an individual stock basis, Bank of America recognizes the "Big Three" AI chip manufacturers—Nvidia, Broadcom, and Marvell Technology—as prime picks for 2025. This preferred stocks roster also encompasses giants in semiconductor equipment, like Lam Research, automotive chip leaders such as ON Semiconductor, and key players in electronic design automation software like Cadence Design Systems.

The analysis highlights that Nvidia, Broadcom, and Marvell stand to benefit significantly from the surging demand associated with data center AI chips, as hyperscale cloud customers and data center operators are in a buying frenzy for AI computational resources

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Meanwhile, Lam Research is set to gain from recovering NAND flash demand and an uptick in semiconductor equipment spending in China.

Furthermore, ON Semiconductor, riding the wave of electric vehicle demand, stands to capitalize on a recovery that could manifest in the latter half of 2025. Cadence Design Systems is likely to see sustained growth as tech behemoths such as Nvidia, AMD, and Apple ramp up their high-performance AI chip development endeavorsElectronic design automation (EDA) tools are becoming indispensable for the design of all types of chips, and the demand for such software is expected to rise significantly.

Alongside these "chip titans," Bank of America underscores other firms like ARM, Micron, Coherent, Credo Technology, and Macom, which are also set to reap substantial rewards from the current AI renaissance.

Nonetheless, the investment climate is not without its risks