BofA Securities analyst Vivek Arya said the U.S. semiconductor sector is moving into a more balanced phase, with supply and demand largely aligned and earnings expectations reset, setting up modest upside rather than a sharp rebound in 2026.

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Supply and Demand Set Up For Modest Earnings Beats

Arya said sentiment around analog semiconductor stocks has improved early in calendar 2026, with shares across his coverage up sharply quarter to date and roughly tracking gains in the PHLX Semiconductor Sector.

He attributed the shift to positive guidance updates from Microchip Technology Inc (NASDAQ:MCHP), constructive messaging from companies at CES, and a broad reset of estimates after recent earnings reports.

With most companies now shipping closer to true end demand following modest inventory replenishment, Arya expects calendar fourth-quarter results to come in line with or modestly above expectations, alongside calendar first-quarter guidance increases.

He said industrial-focused names such as Texas Instruments Inc (NASDAQ:TXN), Analog Devices Inc (NASDAQ:ADI), and Microchip appear best positioned, supported by rebounds in automation, medical, and energy markets, favorable pricing, and continued growth in strategic AI and aerospace and defense businesses.

Seasonal Trends Dominate, Macro Improvement Still Needed

After multiple estimate cuts in 2025, Arya said diversified semiconductor forecasts now align closely with historical seasonal demand patterns from the fourth quarter of 2025 through the second quarter of 2026.

Current models assume slightly above-seasonal growth in the second half of 2026, likely reflecting expectations for limited restocking.

He noted Microchip stands out as the only company projected to deliver consistent above-seasonal growth as shipments catch up with consumption, while forecasts for Analog Devices may understate company-specific growth drivers.

Arya cautioned that the macro backdrop remains stable but not improving, with tariff uncertainty, global PMIs below 50, flat auto production, and slowing EV growth potentially delaying a stronger demand upcycle.

Selectivity Drives Stock Picks Across Semiconductors

Given the mixed backdrop, Arya said selectivity remains critical. He favors analog semiconductor companies with strong free cash flow, attractive valuations, or product-cycle-driven growth that can offset macro uncertainty.

His top pick is Analog Devices, supported by its defensive free cash flow margins, pricing power, and exposure to AI and aerospace and defense markets.

Arya also highlighted MACOM Technology Solutions Holdings, Inc (NASDAQ:MTSI) as his preferred small- and mid-cap name, citing its leverage to high-speed AI optics and next-generation aerospace and communications programs.

In auto semiconductors, he prefers NXP Semiconductors NV (NASDAQ:NXPI) and Allegro MicroSystems Inc (NASDAQ:ALGM), while maintaining a neutral stance on Microchip and ON Semiconductor Corp (NASDAQ:ON).

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