US chip stocks recorded their worst week in more than a year, with the Philadelphia SE Semiconductor Index falling approximately 9%, marking its largest weekly decline in over a year. The index was down almost 20% from its late-June all-time high, approaching the threshold for a bear market. This downturn is attributed to profit-taking and increased scrutiny over the sustainability of AI capital expenditure, as semiconductor stock valuations had priced in nearly perfect demand for what historically has been a cyclical sector, making them vulnerable to a correction after a rapid ascent.
The weakness in the semiconductor sector has sparked concerns about overextended and highly leveraged investors. Goldman Sachs' head of hedge fund coverage, Tony Pasquariello, noted a buildup of leverage across the market, evidenced by a rise in retail margin, assets under management in leveraged ETFs, and short-dated options volume. Large hedge funds have reportedly reduced their exposure to top AI infrastructure players, with some analysts suggesting investors were "way overextended" on these high-flying names.
Despite the sell-off, the chip index remains up over 60% for the year. Notable declines on Friday included Nvidia shares, which were down 1.6%, Advanced Micro Devices, sliding 3.2%, and Applied Materials, falling 4.8%. SpaceX also dropped 4.6%. However, memory chip companies like Micron and SanDisk erased early losses to trade slightly higher, and SK Hynix's US-listed shares reversed losses to trade 2% higher. The sell-off coincides with reports of Google being behind schedule on its Gemini 3.5 Pro AI model, and Chinese startup Moonshot unveiling a large 2.8 trillion-parameter AI system, rekindling scrutiny on the pace of returns from hefty AI investments by US tech companies.
The sell-off in chip stocks contributed to US equity funds experiencing outflows in the week through July 15, with investors selling a net $4.8 billion in US equity funds, the first weekly net disposal in three weeks, according to LSEG Lipper data. Growth funds saw $7.18 billion in net sales, while value funds attracted $3 billion. Technology sector inflows cooled to a three-week low of $1.57 billion. The significant weight of chip stocks in the S&P 500, now over 20% compared to 8% three to four years ago, means their performance heavily influences overall market movements. This decline occurred despite strong forecasts from Taiwan's TSMC and European equipment maker ASML, highlighting the lofty expectations placed on the sector.
