Semiconductor manufacturing faces risks in 2026 despite AI demand: report

Morningstar expects memory capital expenditure to reaccelerate as shortages emerge in HBM and conventional DRAM.

The semiconductor manufacturing sector is likely to remain driven by artificial intelligence into 2026, but warned that the investment backdrop is becoming more complex as consumer demand weakens and valuations in some AI-linked names look stretched, according to Morningstar.

The research firm stated that AI-related spending is expected to continue supporting capital expenditure growth next year, despite raising execution and cyclical risks.

On demand, Morningstar said non-AI segments are not recovering quickly enough to drive a broad-based investment upturn. Whilst semiconductor exports have been strong, the firm pointed to slower growth in equipment imports, which it said suggests targeted debottlenecking rather than large-scale capacity expansion.

Morningstar also flagged potential headwinds from rising memory costs. It stated that device demand could be pressured as higher memory prices push up average selling prices, whilst growth in new energy vehicles may slow in 2026 as subsidies are reduced.

By contrast, the firm said AI-related demand underpins the memory outlook into 2026, noting that high-bandwidth memory (HBM) capacity for 2026 is already sold out.

For end markets, Morningstar expects smartphone demand in 2026 to remain weak, citing higher memory costs as a constraint. It said corporate AI spending is likely to stay resilient and that capital expenditure by cloud service providers is expected to continue rising.

On the supply side, Morningstar said capital expenditure in both memory and foundry is likely to be profitable over the long term, driven by AI investments, security-related demand at mature nodes, and the conversion away from legacy products.

The firm said China’s rapid capacity expansion has had a limited impact on cutting-edge foundry and DRAM supply. Morningstar noted that Chinese foundry project announcements peaked in 2022 and are largely focused on 28-nanometre processes.

Morningstar expects memory capital expenditure to reaccelerate as shortages emerge in HBM and conventional DRAM such as DDR5, but said meaningful new capacity is unlikely to come onstream before 2027.

It highlighted planned expansions by SK Hynix and Micron, largely focused on HBM. Despite reshoring trends, the firm said Asia remains the preferred region for new manufacturing capacity, with the Asia-Pacific region accounting for about 90% of the global expansion pipeline.

The report also said the risk of a structural oversupply in silicon wafers appears low. Wafer shipments fell 2.7% in 2024, but Morningstar said volumes could rebound by 4.5% in 2025, citing a 5% increase in the first nine months of the year. It added that disciplined capacity expansion should help limit price erosion.

From a valuation perspective, Morningstar said ex-China foundries, Sino-American Silicon and Renesas appear undervalued, whilst memory producers screen as overvalued. The firm said it does not agree with the view that memory cyclicality has become structurally lower.