The chip stocks leading the U.S. stock market into a bull market are about to explode in a new round of "mad cow rally"?

According to the Zhitong Finance APP, a research team from Citigroup on Wall Street stated in a report on Tuesday that as the third quarter earnings season for U.S. stocks begins, despite a strong performance from a few chip stocks like Taiwan Semiconductor (TSM.US) and NVIDIA (NVDA.US) that have fully benefited from the AI boom, the entire U.S. chip sector has experienced an exaggerated wave of sell-offs due to sluggish non-AI demand. The Citigroup research team now believes that market funds are nearing a point to buy chip stocks on dips again, which also means that one of the core driving forces leading U.S. stocks into a bull market since 2023—chip stocks—may regain global fund favor after being sold off during the earnings season, potentially igniting another "crazy bull" super market trend, becoming the center stage of the U.S. stock market.

In a report to clients, Citigroup analyst Christopher Danly's team wrote: "During the chip companies' earnings season, consensus expectations fell by about 11%, and the Philadelphia Semiconductor Index dropped nearly 10%, primarily due to continued weakness in demand for analog chips and microchips, leading to significant declines in stocks like Microchip Technology (MCHP.US), NXP Semiconductors (NXPI.US), and Intel (INTC.US)."

"However, we believe that this irrational decline/severe sell-off is nearly over, and attention is gradually shifting towards 2025. We expect the overall sales of the global semiconductor market to grow by about 9% year-on-year in 2025, with an anticipated 17% year-on-year growth in 2024 based on last year's relatively weak performance," Citigroup added in the report.

Christopher Danly's Citigroup research team stated that the long-term downward trend in the demand for industrial terminal chips, which is currently the weakest segment in the chip sector, should "soon disappear," and they expect the inventory adjustment in another long-term weak market—the automotive chip market—to conclude in the first half of 2025.

"Conversely, the chip markets in segments such as PCs, smartphones, and data center servers, which account for another 75% of chip market demand, continue to show 'stable growth.' Investors should now establish stock positions in the chip industry and 'shift to a more aggressive allocation exposure' in the first quarter of 2025, partly due to the massive AI-related expenditures from large tech companies like Amazon, Google, and Microsoft," the Citigroup research team added.

In this research report, the Citigroup research team continues to maintain a "buy" rating for AMD (AMD.US), Analog Devices (ADI.US), Broadcom (AVGO.US), Micron Technology (MU.US), Microchip Technology (MCHP.US), Texas Instruments (TXN.US), NVIDIA (NVDA.US), and KLA Corporation (KLAC.US).

AI Chips and Memory Chips Support Half of the Semiconductor Market

Currently, the demand for AI chips in data center servers and memory chips is quite strong, and it is likely to remain so for a long time. The latest statistics released by the Semiconductor Industry Association (SIA) show that driven by strong demand for NVIDIA's H100/H200 data center server AI chips, global semiconductor market sales reached $166 billion in the third quarter of 2024, a year-on-year increase of 23.2% compared to the third quarter of 2023 Compared to the already strong sales in the second quarter of 2024, there was a quarter-on-quarter increase of 10.7%. In September 2024, the global semiconductor market sales were approximately $55.3 billion, a quarter-on-quarter increase of 4.1% compared to the semiconductor market sales of $53.1 billion in August 2024.

Regarding the demand outlook for the semiconductor market in 2025, according to Gartner's latest forecast, the global semiconductor market is expected to reach approximately $717 billion in total sales in 2025, an increase of 14% compared to 2024. This growth is primarily driven by the demand for AI-related semiconductors in data centers and the recovery of consumer electronics incorporating edge AI. Gartner predicts that the global semiconductor market sales may reach $630 billion this year, indicating a significant year-on-year growth of 18.8%. Gartner forecasts that the memory chip market will perform the strongest in 2025, expected to grow by 20.5%, with sales likely reaching $196.3 billion, driven mainly by enterprise-grade NAND flash and DRAM.

The Semiconductor Industry Association (WSTS) released its spring semiconductor industry outlook, indicating a very strong recovery trend for the global semiconductor market in 2024. WSTS has significantly raised its forecast for the global semiconductor market sales scale for 2024 compared to the prediction report at the end of 2023. For 2024, WSTS predicts a market scale of $611 billion, indicating a substantial year-on-year growth of 16%, which is also a significant upward revision from the end of 2023 forecast.

Looking ahead to 2025, WSTS predicts that the global semiconductor market sales scale is expected to reach $687 billion, suggesting an additional growth of approximately 12.5% on top of the already strong recovery trend in 2024. WSTS expects this growth to be primarily driven by the memory chip category and AI logic category, with the overall scale of these two categories expected to soar to over $200 billion in 2025, fueled by the AI boom. Compared to the previous year, WSTS anticipates that the total sales growth rate of the memory chip category dominated by DRAM and NAND will exceed 25% in 2025, while the total sales growth rate of the logic chip category, including CPUs and GPUs, is expected to exceed 10%. Additionally, it is expected that the growth rates of all other sub-markets, including discrete devices, optoelectronics, sensors, and analog semiconductors, will reach single digits.

WSTS predicts that the market size of the analog chip market, which occupies an important share in the chips required for electric vehicles (EVs) and industrial applications, remains sluggish. It is expected that after a contraction of 8.7% in 2023, the market size may shrink by 2.7% in 2024. However, WSTS forecasts that the overall size of the analog chip market is expected to expand by 6.7% in 2025, indicating that the recovery process for analog chips may slowly begin in 2025. Analog chips play an indispensable role in various key functional modules and systems in electric vehicles, including power management, battery management, sensor interfaces, audio and video processing, and motor core control systems