Chip stocks faced a brutal week, with the Philadelphia Stock Exchange Semiconductor Index plummeting 1.6% on Friday, culminating in a roughly 10% weekly decline—its largest in over a year. The index is now down more than 20% from its late-June all-time high, officially marking a bear market. This sharp reversal has prompted investors from Seoul to Silicon Valley to question if the AI boom became over-leveraged and if valuations for semiconductor stocks, which had priced in near-perfect demand, were sustainable.
Several factors contributed to the sell-off. A Chinese AI startup, Moonshot, unveiled what it claimed to be the world's largest open-weight AI system, intensifying scrutiny of the potential returns on heavy AI investments by U.S. tech companies. Additionally, a Bloomberg report suggested Alphabet's Google is behind schedule on its Gemini 3.5 Pro AI model. Analysts like Toni Meadows of BRI Wealth Management highlighted that the pullback reflects profit-taking and increased scrutiny over the sustainability of AI capital expenditure, noting that semiconductor stocks, historically cyclical, were vulnerable to such a rapid rise.
Concerns about leverage also mounted. Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, pointed to an increase 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. Individual chip stocks were heavily hit, with Nvidia down 2.2%, Intel dropping 2%, Applied Materials falling 5.6%, Micron slipping 0.5%, and SanDisk closing down 4% on Friday. Despite the significant downturn, the chip index remains up more than 60% for the year, and some options traders are reportedly looking to buy the dip.
The broader market also felt the impact. The Nasdaq 100 Index closed down 1.5% for its worst week in almost a month, and the S&P 500 Momentum Index, which tracks strong-performing S&P 500 stocks, pulled back 11% in July compared to a less than 1% drop in the broader S&P 500. This market rotation is seen by some, like Citi's Beata Manthey, as necessary for the broader equity rally to extend beyond the tech sector. Upcoming earnings reports from Alphabet, Tesla, and Intel next week will be closely watched for further insights into the tech sector's health.
