Jefferies expects the outlook for the water fab equipment (WFE) market to remain broadly positive for 2025 and 2026, which will buoy stock prices for semiconductor production equipment (SPE) companies amid ongoing valuation adjustments, according to a Monday research note.

Jefferies estimates the WFE market value to hit $96 billion in 2024, up 2% year over year, with robust Chinese investments offsetting weaknesses in Taiwan, Korea, and other regions.

The SPE market will also grow 10.4% year over year in 2025, from 13.4% previously.

Next year's investor prospects for the WFE market face risks amid a slowdown in Chinese investments and US regulations concerning China, a decline in memory investments and a downward revision in Intel investments.

However, Jefferies said it expects government semiconductor assistance measures and capital injections to boost local Chinese investments, while investments in additional high-bandwidth memory (HBM) capacity and dynamic random-access memory (DRAM) should remain buoyant.

As a result, Jefferies forecasts the WFE market to further expand to $110 billion in 2026.

Among SPE stocks, Jefferies recommends Tokyo Electron (TYO:8035), given its cheap valuation in time for the expected growth in the SPE market in the next years, and Disco (TYO:6146), due to its solid longer-term growth chances.

The research firm also adjusted its price target for TOWA (TYO:6315) to 3,500 yen from 14,000 yen following a 1-to-3 stock split.

Aside from TOWA, Jefferies adjusted the price targets for another 11 of its 18 covered SPE stocks, with cuts between 5% and 23%.

The research firm maintained a buy recommendation for 16 stocks, saying that valuation should eventually rise given lower volatility and growth prospects for the SPE market.