TSMC's 2026 Expectation Gap: Is the AI Foundry's Pricing Power Priced In?

The market's AI narrative is clear: Nvidia and Broadcom are the growth engines. Morgan Stanley's recent outlook for 2026 still strongly favors these sector leaders, with the bank maintaining an Overweight rating on Nvidia and a preference for it as the "nucleus for the AI trade." The logic is straightforward-these companies design the chips that power the AI boom, and their visibility into 2026 remains solid. This growth story commands a premium, reflected in their rich valuations. Nvidia trades at a P/E ratio of 48, while Broadcom commands an even higher multiple of 63.

TSMC occupies a different, yet essential, role. It is the indispensable foundry, the factory that turns chip designs into reality. Its own growth story is robust, with JPMorgan forecasting 30% USD revenue growth for 2026 driven by advanced nodes and packaging. Yet, the market's view of TSMC's pricing power and future earnings is notably more conservative. Its P/E ratio sits around 34, a significant discount to its two key customers.

This valuation gap is the core divergence. The market is pricing in TSMC's critical role, but not the same level of premium growth and pricing power it sees in Nvidia and Broadcom. For now, the expectation is that TSMC will deliver strong execution and solid expansion, but perhaps not the hyper-growth narrative that justifies a multiple near its peers. The setup is classic expectation arbitrage: TSMC's stock may be undervalued relative to its fundamental importance, but the market is waiting for proof that its own pricing power can close the gap.

Valuation Reality Check: What's Priced In vs. TSMC's Potential

The numbers tell a clear story. JPMorgan forecasts 30% USD revenue growth for TSMC in 2026, a robust expansion driven by advanced nodes and packaging. Yet the stock trades at a P/E ratio around 34, a steep discount to Nvidia's 48 and Broadcom's 63. This gap is the expectation arbitrage in action. The market is pricing in TSMC's growth, but not the same premium for its pricing power.

That pricing power is real and strategic. Management has implemented a multiyear plan to raise prices for its advanced nodes, with hikes of 3% to 10% depending on volume. This isn't a one-time bump; it's a signal of sustained supply constraints and a deliberate shift to capture more value from the AI boom it enables. The setup is classic: TSMC is building capacity for future nodes like 2nm, but it's not taking new 3nm designs, forcing customers to pay a premium for the latest tech. This flexing of pricing power provides a tangible upside catalyst that the current valuation may not fully reflect.

Catalysts and Risks: Closing the Gap in 2026

The path to closing TSMC's expectation gap in 2026 hinges on a few key data points. The primary catalyst is the company's next earnings report, where management's guidance for N3/N2 capacity and blended average selling price (ASP) will be scrutinized for signs of sandbagging or acceleration. JPMorgan's forecast of 30% USD revenue growth for 2026 is built on rising N3 demand, an accelerating N2 ramp, and an uptick in blended ASP. Any deviation from that trajectory, especially on the pricing front, will be a major event.

Management's multiyear plan to raise prices for advanced nodes by 3% to 10% is the core thesis for margin expansion. The market will watch for evidence that these hikes are translating into real revenue per wafer, validating the pricing power narrative. Positive catalysts include continued strong demand for advanced nodes and any beat on custom chip shipments, which would confirm the strength of the AI-driven demand cycle TSMC is riding.

The major risk is a slowdown in AI spending or a shift in hyperscaler preferences that could delay the ramp of advanced nodes. Morgan Stanley's outlook for 2026 is strong, citing scaling up of token growth for complex inference as a key support. But if that demand softens, it could force a guidance reset, undermining the growth story that the current valuation already prices in. The expectation gap is a two-way street: the stock could pop on a beat, or it could fall if the reality of execution lags the whisper number.