Jefferies Names 3 European Chip Stocks to Outperform as Sector Nears Cycle Peak

Jefferies analysts are forecasting the global semiconductor upcycle will peak in the fourth quarter of 2026, creating valuation headwinds for European chip stocks even as underlying demand remains strong. In a new research note ahead of the Q3 earnings season, the firm identified three companies it believes can outperform a potential sector-wide de-rating.

Cycle Peak and Valuation Headwinds

According to Jefferies analyst Janardan Menon, the cycle peak is being driven primarily by an "adverse base effect" from a sharp increase in DRAM prices in Q4 2025. While semiconductor demand is currently robust, the firm warns that multiple compression is already affecting stock valuations.

The note highlights that sector valuation multiples historically decline 3-6 months ahead of a cycle peak, a trend Jefferies has observed since July 2025. "While short periods of re-rating are possible, historical trends suggest that multiples are directionally likely to head lower in the medium term," Menon wrote. This backdrop is expected to deliver "somewhat lacklustre" performance for most European semiconductor stocks.

Modest Expectations for Q3 Earnings

Heading into the third-quarter reporting season, Jefferies expects most chip companies to at least meet consensus forecasts for revenues and margins. However, the firm anticipates that positive earnings surprises and upward revisions to guidance will be modest.

With the cycle maturing, Jefferies believes there will be limited scope for significant upgrades to full-year earnings estimates. This lack of positive catalysts could make it difficult for stocks to achieve a sustained re-rating, according to the report.

Navigating the Downturn: Jefferies' Top Picks

Ad

Against this cautious backdrop, Jefferies is focusing on stocks where it believes future earnings are underappreciated by the market. "We prefer stocks where we believe market expectations for 2027 are too conservative, or where new demand or margin drivers could emerge over the next year or so," Menon stated.

The firm's top picks are:

• Infineon Technologies: Seen as a primary beneficiary of rising prices and a potential acceleration in the automotive cycle through 2027.
• Nokia: Jefferies is explicit that consensus earnings estimates for fiscal year 2027 are currently "too low."
• ams OSRAM: Also selected on the basis that its fiscal year 2027 earnings could outperform what is currently priced into the stock.

Broader Sector Risks

For the semiconductor capital equipment segment, Jefferies noted that while demand for companies like ASML and ASM International is constructive, bullish forecasts for 2027 leave limited room for upside. The most significant tail risk identified for the entire industry is a potential slowdown in AI investment.

"Any deceleration in AI investment growth would have a material negative impact on the semiconductor supply chain due to inventory build," Menon warned. The report suggests that growing concerns about power availability and the pace of data center construction are already contributing to valuation pressure across the sector.