The iShares Semiconductor ETF (NASDAQ:SOXX) finds itself at a crossroads. JPMorgan’s latest technical update reveals that the Philadelphia Semiconductor Index, a benchmark for the iShares Semiconductor ETF, has largely been propelled to the upper limit of a multimonth trading range by a rally in AI-related stocks.

Yet the index now faces stiff resistance near 5,400, raising questions about its ability to sustain a long-term rally without support from the more cyclical analog semiconductor group.

AI has been transforming industries and driving demand for semiconductors. Leading chipmakers like Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO) have led the rally, riding the AI wave. Nvidia’s advanced Blackwell GPUs and Broadcom's custom AI accelerators enjoy solid market interest.

JPMorgan warns the heavy reliance on AI names could be risky, as the analog semiconductor group, closely linked with global manufacturing cycles, dawdles.

JPMorgan said the analog segment is not performing up to par and this is consistent with with the PMI level globally being around 50, indicating a certain level of pessimism. SOXX would need participation from this segment to break out of its trading range and sustain a broader rally.

“We also highlight just how correlated the analog group is to the global manufacturing cycle, with the current pricing roughly in line with a 50 global manufacturing PMI reading. That coincides with the US exceptionalism theme that seems priced across markets in other asset classes,” JPMorgan analysts said in a note.

Why SOXX Still Holds Promise

Despite these concerns, SOXX offers a strong value proposition for investors looking for exposure to the semiconductor industry’s growth. The ETF, which focuses solely on chip companies, is expected to capitalize on the AI spending boom. With Nvidia, Broadcom and Advanced Micro Devices (NASDAQ:AMD) accounting for significant portions of its portfolio, SOXX bets heavily on the sector's leaders.

Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) alone are projected to spend $300 billion on AI infrastructure by 2025, according to a November report by Business Insider citing Morgan Stanley. This influx of investment bodes well for the ETF, which has holdings in nearly every key hardware stock involved in the AI revolution. With a 7.84% weighting in the ETF, Nvidia will expose investors to its industry leading advancements, whereas diversification within the AI hardware universe will come from Broadcom (with 10.94% weightage) and AMD (6.87%).

Watchful Optimism

JPMorgan's analysis brings both opportunities and risks for iShares Semiconductor ETF to the spotlight. For instance, a 2-point improvement in global manufacturing PMI could open up a 20% upside for the analog semiconductor group, as analyzed by JP Morgan. This can potentially improve the overall performance of iShares Semiconductor ETF. Conversely, the dependence of the ETF on AI-driven growth makes it sensitive to setbacks of the highly fragmented broader semiconductor market.

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