AI Competition to Drive Chip Demand Despite Calls for Restraint, BofA Says

The competitive race to achieve artificial intelligence dominance is too vital to slow and moving too fast for effective regulation, ensuring a continued surge in demand for semiconductors, according to analysts at Bank of America.

In a research note, analysts led by Vivek Arya described the current landscape as a "classic prisoner’s dilemma," where individual participants cannot afford to exercise restraint even if it were for the collective good. They view recent debates over the pace of AI development as "noise relative to a secular market."

A Secular Buildout

Bank of America projects that AI-related capital expenditures could triple to more than $3 trillion by the end of the decade. This bullish forecast is supported by what the bank calls robust demand signals, including 100% network utilization and rising rental rates for even older-generation chips.

The analysts pointed to a multi-front global AI race pitting the U.S. against China, established hyperscalers against emerging neoclouds, and sovereign nations against frontier research labs. Because AI is a strategic priority for the U.S. administration to maintain technological leadership and drive GDP growth, BofA believes Washington is unlikely to meaningfully constrain domestic companies.

Valuation Remains Attractive

Ad

Despite a 67% year-to-date rally in the Philadelphia Semiconductor Index, BofA argues that valuations in the sector remain attractive. The index trades at 19 times forward earnings, in line with the S&P 500, but is delivering earnings growth seven times faster at 139% year-over-year.

On a 24-month forward basis, the semiconductor index trades at a 14.8 times price-to-earnings ratio, an 11% discount to the S&P 500. The analysts said this implies "excessive" skepticism from the market regarding the durability of AI spending.

Near-Term Caution Advised

While maintaining a bullish long-term outlook, BofA remains tactically cautious in the near term, citing potential volatility from interest rates, Middle East tensions, and the upcoming U.S. midterms. The bank expects any regulatory action to resemble industry-led self-regulation, similar to models in finance or entertainment, rather than government intervention capable of slowing deployment or capital spending.

Investors are watching for key sector catalysts, including the upcoming earnings report from Micron (NASDAQ:MU) on September 30, which will serve as a test for memory pricing and supply dynamics.