Wall Street’s favorite bet faces sharp reversal as chip stocks plunge
Chip stocks face sharp reversal as volatility spikes, with major losses and investor doubts
Wall Street’s favorite bet on semiconductor stocks has faced a sharp reversal, as volatility surged and major losses triggered concerns over the sustainability of the AI-driven rally. The Philadelphia Stock Exchange Semiconductor Index (SOX), which has been a key driver of equity market gains this year, plunged 21% in July, marking its worst month since October 2008. The index, which tracks 30 of the world’s largest chipmakers, saw intraday swings of at least 2% on all 22 trading days, a level not seen since 2020. This volatility reflects growing uncertainty over whether the massive AI spending boom will continue, with investors questioning the long-term viability of the sector’s explosive growth.
Volatility and market shifts
A gauge of realized volatility for the SOX over the last 60 days has reached its highest level since the start of the Covid pandemic, highlighting the extreme swings in investor sentiment. The rapid decline has forced some investors to reassess their positions, with hedge funds like Situational Awareness compelled to sell billions of dollars in tech shares to meet margin calls. The fund, led by Leopold Aschenbrenner, had previously invested heavily in AI-related companies, including semiconductor maker Sandisk Corp., which lost nearly half its value in July after a dramatic 858% rise earlier in the year. Individual investors, meanwhile, have poured a record $12 billion into semiconductor-related exchange-traded funds (ETFs) in the last week alone, according to Bloomberg Intelligence. This level of activity is unprecedented, with Semiconductor ETFs seeing flows and trading volume that have never been recorded before. “Semiconductor ETFs have never seen this level of activity in either flows or trading volume,” wrote BI analyst Eric Balchunas.
Market dynamics and investor behavior
Some of the biggest losers include American depositary receipts of Taiwan Semiconductor Manufacturing Co. (TSMC), which fell 15% in July, erasing over $380 billion in market value. Micron Technology also saw a 29% drop, wiping out $374 billion in valuation, while Intel’s monthly decline was its largest since September 2000, erasing about $247 billion. In contrast, companies like Nvidia and Broadcom saw gains, reflecting the divergent performance within the sector.
The earnings explosion we’ve seen is just not sustainable, said Charles Lemonides, chief investment officer at Valueworks. “The bigger question is whether margins can be sustained.” He added that margins are currently out of sync with historic norms, making it reasonable to expect a correction. Despite the sharp selloff, the industry’s growth outlook for the coming year remains optimistic, with analysts forecasting continued earnings growth for firms like Nvidia and Broadcom. However, many on Wall Street remain skeptical about the sustainability of the current cycle. While some investors believe the selloff may have created a short-term buying opportunity, the long-term prospects for chip stocks remain uncertain.
It wouldn’t surprise me if, after this selloff, we saw a pretty solid bounce from chips, said Lemonides. “I think it is unlikely that they will lead the next leg of the bull market.” The fundamental picture beyond the AI-driven rally is coming into question, with growing competition and the rise of open-source AI models challenging the dominance of traditional chipmakers.