Bank of America analysts have identified three semiconductor stocks that they believe are poised to outperform as the SOX index faces a potential rebound in the fourth quarter.
Despite the SOX's modest 13% year-to-date gain, the index has faced seasonal headwinds and ongoing geopolitical uncertainties. However, Bank of America sees a potential recovery starting in October, which could lead to a strong finish for the year.
"If history is any guide, SOX could recover starting in October, with CQ4 and CQ1 the two strongest quarters for semi stock performance (7-10.5% avg. returns, 400bps+ ahead of SPX, since 2010)," wrote the bank.
In their latest note, BofA analysts emphasize that the SOX is still in the early stages of an upcycle. "We are only in Quarter 4 of this upcycle that started in September 2023 and has produced 28% SOX returns, while prior upcycles have lasted 10 quarters and generated 67% average SOX returns," they noted.
This historical context suggests that the current cycle has more room to run.
For investors looking to capitalize on this potential rebound, BofA highlights three top picks: Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), and KLA Corporation (KLAC). These companies are described as "the most profitable vendors in their respective end-markets," making them strong candidates to lead the SOX's recovery.
While the note acknowledges ongoing volatility and the potential for a slower, more recessionary scenario, the analysts maintain that these three stocks are well-positioned to benefit from a benign rebound in the SOX index.
As the fourth quarter approaches, BofA says investors may find these chip stocks to be attractive opportunities to ride out the market's ups and downs.