Evercore ISI: Semiconductors Enter the Late-Cycle Phase, While AI Demand Growth Still Faces Valuation Pressure

Why does the firm view the cycle as late-stage despite strong demand?

Evercore ISI believes the semiconductor cycle is driven mainly by supply and typically lasts 3–4 years; shifts in computing platforms, by contrast, are demand-driven and can last 15–20 years. Therefore, long-term AI growth and a short semiconductor cycle entering its late phase can occur at the same time.
After third-quarter earnings, demand trends were generally favorable for the 2027 earnings outlook at most companies under coverage, apart from Intel; however, high memory prices have curbed PC demand, while server CPUs, wafers and substrates are also supply-constrained.
Inventories tell another part of the story: based on the firm’s adjustment for chip price increases, inventory values at electronics manufacturing services providers in the second quarter of 2026 remained 25% above the pre-pandemic trend, and inventory days also began to rise.

Intel’s data center and AI businesses in the third quarter of 2026 came in 9.4% above expectations, and the company guided to sequential growth of about 15% in the fourth quarter. Management expects server CPU market shipments to grow by more than 30% in both 2026 and 2027, but supply remains constrained.
The client business came in 9.5% below expectations: higher memory prices weighed on consumer demand, enterprise IT budgets were weak, and channel inventories built up. Intel expects PC market shipments to decline in both 2026 and 2027, followed by several quarters of inventory adjustment.
Cloud providers’ comments support continued growth in CPU demand. Microsoft expects the acceleration in capital spending in the second half of its fiscal year to come mainly from CPUs, which also include higher memory costs; Amazon notes that AI post-training and agentic workloads require substantial CPU capacity.

The four hyperscalers’ capital-spending forecast for 2026 was raised from 711 billion dollars in July to 714 billion dollars in October, an increase of about 1%, markedly slower than the 9% increase in April. The forecast for 2027 was raised from 964 billion dollars to 1.02 trillion dollars, an increase of 6%.
The firm remains positive on the longer AI demand cycle: cloud providers’ new annualized recurring revenue is accelerating, incremental operating margins are improving, and competition among models is also driving infrastructure investment. At the same time, the firm expects large cloud providers’ free cash flow to decline and turn negative in 2027, putting pressure on semiconductor valuations.
Evercore ISI raised its baseline forecast for global wafer-fab equipment spending in 2027 from 215 billion dollars to 235 billion dollars. Support comes from AI memory and capacity expansion in advanced processes; by contrast, the firm expects capital-spending cuts in China and in analog chips and microcontrollers to weigh on demand for mature-node equipment.

Evercore ISI believes that historically, when year-over-year semiconductor revenue growth peaks, the Philadelphia Semiconductor Index’s P/E multiple tends to contract. The firm expects earnings estimates to continue being revised upward, but says this can only partly offset valuation declines, making stock selection more important.
As of 29 October 2026, the Philadelphia Semiconductor Index’s next-12-month P/E was about 17x, below the S&P 500 Index’s 19x. The firm still expects the valuation contraction in this cycle could be greater than most people anticipate.
Growth in equipment demand does not necessarily lift equipment-stock valuations in tandem: during the previous two expansions in wafer-fab equipment spending, semiconductor-equipment stocks’ P/E multiples contracted relative to the S&P 500.