(This story is for CNBC Pro subscribers only.)
Despite escalating tensions between the U.S. and China, Bank of America said the semiconductor industry is at a "crucial juncture."
The Wall Street firm remains bullish on the chip industry thanks to its secular and structural growth drivers even as the world's two largest economies face a rift over China's relationship with Hong Kong. The adoption of 5G remains a major headwind for the industry, Bank of America said.
"Longer-term we believe semis will play a critical role in the new digital economy which is built on the processing, storing and networking abilities enabled by this very profitable, consolidated and disciplined sector," Bank of America research analyst Vivek Arya told clients.
Shares of the iShares PHLX Semiconductor ETF have surged more than 40% in the past year despite a U.S.-China trade war and the deadly coronavirus pandemic. In the same period, the S&P 500 is up 11%. Typically, chip stocks are a good read on the relationship between the U.S. and China. An escalation in tensions could cause the sector to suffer.
Bank of America said China's leverage in semis is "very limited," given it consumes 35% of the global chip supply, which is almost all based on technology owned by the U.S. and its western allies.
"This is why we have not seen (and likely won't see) any major retaliation by China even as its tech champion (Huawei) continues to face more US restrictions," said Arya.
The firm created a list of stocks for clients of its top picks in the chip sector. All of the listed stocks have upside to the firm's 12-month price target.