Morgan Stanley has revised its 2026 Wafer Fab Equipment (WFE) market forecast while simultaneously adjusting ratings on three core semiconductor equipment stocks: upgrading Applied Materials (AMAT.US) to "Overweight", upgrading Lam Research (LRCX.US) to "Equal-weight", and downgrading KLA-Tencor (KLAC.US) to "Equal-weight". In Monday's pre-market trading, Applied Materials shares rose approximately 2%, Lam Research gained about 1%, while KLA-Tencor shares fell nearly 2%.

**2026 WFE Market Forecast Raised, Memory Equipment Drives Growth**

The analyst team led by Shane Brett has raised their 2026 global WFE market size forecast from $122 billion (5% year-over-year growth) to $128 billion (10% year-over-year growth). They noted that this increase is almost entirely attributed to the memory equipment sector, with the current baseline forecast for memory equipment WFE ($48.7 billion) now approaching their previous optimistic forecast ($50 billion).

Specifically, analysts raised their 2026 Dynamic Random Access Memory (DRAM) related WFE forecast to $34.9 billion, approaching the optimistic expectation of $35 billion, and increased NAND flash related WFE forecast to $13.8 billion, slightly below the optimistic expectation of $15 billion.

Brett's team analyzed that strengthening DRAM prices will likely translate into more aggressive DRAM capital expenditure plans, while NAND flash capex improvements may experience some lag - partly due to capital expenditure shifting toward DRAM, and partly because memory manufacturers wish to maintain more prudent capital discipline.

**Applied Materials: Significant Valuation Discount with Outstanding Growth Potential**

Morgan Stanley upgraded Applied Materials from "Equal-weight" to "Overweight" and raised the target price from $172 to $209. The analyst team stated: "Applied Materials currently trades at a 25% discount to Lam Research, while the average valuation gap since 2023 has been only 10%; our newly set target price implies this discount will narrow to 15%. From a market sentiment perspective, the stock has a 3:1 ratio of optimistic to pessimistic expectations, and among our coverage universe, Applied Materials has the greatest earnings leverage to new DRAM fab projects. Additionally, we believe risks from the Chinese market, 'ICAPS sectors' (IoT, Communications, Automotive, Power Semiconductors, Sensors), and advanced logic processes have significantly diminished, leading us to judge the stock's risk-reward profile as tilted toward the optimistic side."

Concurrently, analysts raised Applied Materials' 2026 earnings per share (EPS) forecast from $9.58 to $10.45.

**Lam Research: Memory Market Recovery Drives Rating Upgrade but Remains Cautious**

Analysts upgraded Lam Research from "Underweight" to "Equal-weight" and raised the target price from $92 to $125. They acknowledged their previous assessment of the memory end market was biased, as the memory market has clearly recovered; therefore, they raised Lam Research's 2026 EPS forecast from $5.12 to $5.43.

The analysts added: "Although we still forecast a 3% decline in Chinese market WFE demand for 2026, we have now raised our NAND-related WFE demand forecast (34% year-over-year growth) and non-China logic chip WFE demand forecast (16% year-over-year growth). We expect Lam Research's performance to outpace the overall WFE industry for the third consecutive year (15% growth vs. industry 10%)."

However, analysts also noted that to be more bullish on the stock's upside potential, revenue would need to reach $24 billion with EPS at $6, hence the current rating remains "Equal-weight".

**KLA-Tencor: Strong Fundamentals but High Valuation, Questionable Relative Return Advantage**

Brett's team stated: "KLA-Tencor's operating conditions have continued to improve this year, with its core growth drivers Taiwan Semiconductor Manufacturing Company (TSM.US), DRAM business, and advanced packaging business all performing strongly. However, KLA-Tencor currently trades at a 30% premium to Applied Materials and Lam Research, and we believe its subsequent relative return advantage is difficult to sustain."

Nevertheless, analysts still raised KLA-Tencor's 2026 EPS forecast from $37.11 to $39.03, reflecting recognition of its fundamentals.