Evercore ISI's Richard Ross Recommends Semiconductor Stocks Post-AI Pullback

Semiconductor Sector Poised for Rebound Amid AI Infrastructure Demand

Evercore ISI's technical analysis head, Richard Ross, initiated a buy recommendation on semiconductor and AI infrastructure stocks, signaling a strategic entry point after a significant summer correction in the sector. He specifically highlighted companies integral to the burgeoning artificial intelligence ecosystem, which have seen their valuations temper in recent weeks. Ross's call underscores a belief that the underlying demand for AI compute power remains robust despite short-term market fluctuations.

This optimistic outlook follows an average decline of approximately 15% from the sector's peak in late July, as tracked by the VanEck Semiconductor ETF ($SMH), which fell from $177.25 to a recent low of $149.80 in mid-August. The pullback represents the most substantial correction for the sector since early 2023, creating what Ross identifies as a favorable risk-reward profile for investors looking to capitalize on the long-term AI growth narrative.

Market Impact

The recent correction impacted major players within the semiconductor space, particularly those at the forefront of AI development. Nvidia Corp. ($NVDA), a bellwether for AI chips, saw its shares decline from a peak of $480 in July to approximately $400 in mid-August, representing a 16.7% drop. Similarly, Advanced Micro Devices Inc. ($AMD) experienced a roughly 19.2% pullback, falling from $130 to $105 during the same period. Other key infrastructure providers such as Broadcom Inc. ($AVGO) and Marvell Technology Inc. ($MRVL) also registered double-digit percentage declines from their summer highs.

This downturn marked a significant pause after a stellar first half of 2023, where the $SMH gained over 50%, fueled by the fervent excitement surrounding generative AI. The collective market capitalization of the companies within the $SMH contracted by over $300 billion during the August pullback. Historically, such sharp corrections following strong rallies often precede periods of consolidation before renewed upward momentum, particularly if underlying demand drivers remain intact. The cross-asset impact saw some capital briefly rotate into more defensive sectors, though the semiconductor dip did not trigger a broader tech sell-off, suggesting sector-specific profit-taking rather than a systemic shift in sentiment.

What Analysts Are Saying

Richard Ross's technical analysis for Evercore ISI emphasizes that the recent retracement in semiconductor stocks constitutes a healthy consolidation rather than a fundamental weakening of the AI thesis. He noted that the Relative Strength Index (RSI) for the $SMH fell from over 70, indicating overheated conditions, to below 40 during the pullback, suggesting that the sector has become oversold. Ross anticipates a rebound towards previous resistance levels, with potential for $SMH to reclaim $175 in the coming months.

Echoing a bullish sentiment, analysts at Citi recently reiterated their "Buy" rating on Nvidia ($NVDA), projecting a 12-month price target of $520. They cited robust demand for the company's H100 GPUs, which are critical for large language model training, and a strong order backlog extending into 2024. Citi's research suggests that enterprise spending on AI infrastructure is still in its nascent stages, providing a multi-year growth runway for leading chipmakers.

However, some cautionary voices exist. Analysts at Morgan Stanley, while acknowledging long-term AI potential, have expressed concerns regarding potential oversupply in certain memory segments by late 2024 or early 2025, which could temper overall sector growth. They also highlighted the elevated valuations of some AI-focused chip companies, advising investors to be selective and focus on firms with clear competitive advantages and sustainable margins. This perspective suggests that while the AI narrative is compelling, not all semiconductor stocks may benefit equally or maintain their current premium.

What to Watch

Investors eyeing the semiconductor sector should monitor several key catalysts and technical levels in the coming weeks. For the VanEck Semiconductor ETF ($SMH), a critical support level is established around $148, which held during the recent August downturn. A sustained break above the $165 resistance level would signal a more definitive reversal of the recent trend. For Nvidia ($NVDA), the $400 price point serves as strong technical support, while a move past $450 could indicate renewed buying interest towards its previous highs.

Upcoming earnings reports from major chipmakers will provide crucial insights into the health of the AI supply chain and order trends. Nvidia's next earnings call, expected in late November, will be particularly scrutinized for updates on data center demand and future guidance. Similarly, Advanced Micro Devices' ($AMD) performance will be closely watched for progress in its AI accelerator strategy. Beyond individual company results, broader macroeconomic data, including inflation reports and Federal Open Market Committee (FOMC) meetings, will influence investor sentiment towards growth stocks. Any indication of a "higher-for-longer" interest rate environment could pressure valuations across the tech sector, including semiconductors.

Key risk factors that could derail the anticipated rebound include escalating geopolitical tensions, particularly between the U.S. and China, which could impact global supply chains and market access. Slower-than-expected enterprise adoption of AI technologies, or increased competition from new entrants in the AI chip space, also pose threats to current growth projections. Investors should remain vigilant to these developments while evaluating Ross's bullish technical call.