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Because the lead times for semiconductor capital equipment are typically six to nine months, it is necessary to look out further and anticipate what order rates and demand trends will be toward the end of the year going into 2027, Klein said. Customers are ordering in advance because of the wait times, he noted, and therefore companies such as Applied Materials, Lam and KLA have been offering "confident updates."

Meanwhile, demand for memory chips is accelerating, leading to rising prices for NAND and dynamic random-access memory, or DRAM. That demand is pressuring semiconductor manufacturers to add capacity, meaning they are placing orders sooner than expected with semicap makers.

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TD Cowen analyst Krish Sankar named Applied Materials as his "best idea" for 2026 in a note in December. Sankar wrote that about half of the company's customers are exposed to the demand for DRAM and to the buildout of leading-edge foundries for manufacturing advanced chips.

The other thing investors are excited about is that, eventually, Taiwan Semiconductor Manufacturing (TSM) (TW:2330), Samsung Electronics (KR:005930) and Intel (INTC) "will have to expand clean-room capacity and order more equipment for foundry and logic chips," Mizuho's Klein said. Nvidia, Broadcom (AVGO), Advanced Micro Devices (AMD) and others are ordering these types of chips in large quantities.

And investors expect to start seeing equipment orders for the sizable data-center commitments from OpenAI and other buyers, including Meta Platforms (META) and Google (GOOGL) (GOOG), from 2027 onward, he added.

"The focus in [the memory] sector is going to be how much new equipment is being purchased for new capacity," Klein said - adding that it's hard to determine that amount unless memory companies say whether or not they are adding capacity.

Meanwhile, he believes semicap companies have done a good job managing their supply chains coming out of the COVID-19 pandemic. None of the major equipment makers are talking about a shortage of components.

ASML is one of Klein's favorite semicap stocks going into 2026 because of its monopoly on advanced lithography equipment, which it is not allowed to sell to customers in China.

Both the investment community and analysts on the sell side who cover ASML are projecting a big recovery in growth in 2027. After a moderation in demand in 2026, a lot of chip manufacturers such as TSMC, Samsung and Intel will start ordering more lithography tools to supply more AI chips from 2027 onward, Klein said. ASML's valuation may have contracted recently, but there is reason to believe it will start expanding again in the new year, as investors start buying again in anticipation of another growth cycle.

Meanwhile, Klein said Onto Innovation (ONTO) and Teradyne (TER) are two of his favorites among midcap names in the sector because of exposure to high-bandwidth memory.

Teradyne, which makes tools for testing chips, has said in recent analyst calls that it is seeing increasing orders from HBM customers, Klein noted, and he expects that to continue. There is also an expectation by more bullish investors that Teradyne will work with Nvidia as it expands its test-machine orders beyond Japan's Advantest (JP:6857) (ATEYY).

If that becomes official, it could provide a big boost to Teradyne's stock. Analysts are already anticipating a big jump in year-over-year revenue growth, to 22.3% in 2026 from an expected 8.7% in 2025 and 5.4% growth in 2024, according to FactSet data.

"Anytime an equipment company is growing over 15% to 20%, that's really impressive growth for this type of company," Klein said.

Onto, which makes chip-inspection equipment, said on its November earnings call that strength in its advanced packing business is partly from its HBM customers.

While these two names are not inexpensive, Klein said both are guiding for growth acceleration in the second half of 2026, and investors are usually looking for the best growth acceleration in the next six to 12 months.

Meanwhile, Klein added, companies and investors now have more clarity on shipping to customers in China. Demand from that market was a major growth driver for chip-equipment makers in recent years, but investors have been worried about U.S. export controls prompting companies in China to overbuy and stockpile unnecessary tools.

"That was a big overhang because China was as much as 40% to 45% of these companies' revenue, and investors were worried that it would come down to a normal rate and create a downward headwind," Klein said. "The good news is that [in 2026], the restrictions that the U.S. government put in place are already understood and known."

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01-03-26 0900ET