European semiconductor stocks face a challenging year ahead according to Jefferies, which downgraded two specific names to Underperform in its 2026 outlook. The firm’s analysts, led by Janardan Menon, argue that the sector’s valuations expanded roughly 75% during 2025, leaving little room for further multiple expansion. Any sustained gains now require earnings upgrades, which Jefferies views as unlikely.

The firm specifically flagged concerns regarding ASMI and BE Semiconductor, citing weak demand outside AI data centers and structural headwinds like limited cleanroom space and declining China revenues. While Jefferies remains cautious on these two, it maintains a Hold rating on ASML, noting stronger back-end order trends linked to CoWoS and HBM packaging. The broader message is clear: expectations are too high.

Investors looking for upside should focus on industrial and automotive chip makers, though a full restocking cycle has yet to begin. Expect a potentially choppy year for the group.