Investing.com - Jefferies is calling the peak of the global semiconductor upcycle for Q4 2026, warning that multiple compression is already eating into European chip stocks even as underlying demand holds firm.

Jefferies analyst Janardan Menon, writing in a Q3 2026 semiconductor and tech hardware earnings preview, argues the cycle peak is being driven primarily by an adverse base effect from the sharp spike in DRAM prices in Q4 2025.

"Semiconductor demand remains strong and most companies are expected to at least meet CYQ3 expectations," Menon wrote. "However, earnings upgrades may be limited, which could result in stocks fading."

The most direct equity expression of this multiple-compression thesis is Infineon Technologies, which Jefferies simultaneously names as a top pick — an apparent contradiction that reflects the firm's view that select names with underappreciated 2027 earnings can outrun the sector de-rating.

The timing of the valuation pressure is a central concern in the note. Jefferies points out that sector valuation multiples historically pre-empt cycle peaks and troughs by around 3-6 months, and argues that trend has already been visible since July 2025.

"While short periods of re-rating are possible, historical trends suggest that multiples are directionally likely to head lower in the medium term," Menon said.

That backdrop leads the firm to a cautious overall sector view: "This could continue to deliver somewhat lacklustre medium term performance from most European semiconductor stocks in our view, despite ongoing strength in chip demand."

Heading into the Q3 2026 reporting season, Jefferies expects most semiconductor companies to at least meet consensus forecasts on revenues and margins. The catch: with the cycle maturing and only one quarter left in 2026, the firm anticipates that beats and raises will be modest, "limiting upgrades to earnings estimates," according to the report. That limits the fuel available for any sustained re-rating.

3 key chip stocks to watch, according to Jefferies

Against that cautious backdrop, Jefferies narrows its conviction to three names. "We prefer stocks where we believe market expectations for 2027 are too conservative, or where new demand or margin drivers could emerge over the next year or so," Menon said.

Nokia, ams OSRAM, and Infineon are the firm's top picks, each selected on the basis that FY2027 earnings could outperform what consensus currently prices in. Jefferies is explicit that 2027 consensus estimates for Nokia are too low, per the report. On Infineon, the firm sees the company benefiting through 2027 from rising prices and a possible acceleration in the automotive cycle.

For the semiconductor capital equipment segment, the picture is constructive on demand but stretched on valuation. Jefferies expects ASML to stay with its plan to build 85 EUV systems in 2027 and 110 in 2028, with some additional capacity available if needed.

ASM International is seen continuing to recover in DRAM revenues after a soft first half of 2026, with the A14 node cited as a key part of its 2027 growth story. But Jefferies warns that bullish semicap forecasts for 2027 already leave limited scope for upside, and flags the MATCH Act as an ongoing legislative concern for the segment.

The most significant tail risk the firm identifies cuts across the entire semiconductor supply chain. "Any deceleration in AI investment growth would have a material negative impact on the semiconductor supply chain due to inventory build," Menon wrote.

Growing concerns around power availability, pushbacks to data centre construction, and pacing of AI capital spending are, in Jefferies' view, already adding to valuation pressure on the sector.

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