Semiconductor stocks enter bear market on AI valuation doubts
A broad selloff in semiconductor stocks has pushed the Philadelphia Semiconductor Index into a bear market as investors question the sustainability of massive AI spending and rising market leverage.
The Philadelphia Semiconductor Index fell 1.6% on Friday, capping a roughly 10% weekly decline that marks its steepest drop in over a year. The descent pushed the benchmark more than 20% below its late June record high, officially entering bear market territory. Despite the sharp pullback, the index retains a year-to-date gain of over 60%.
The reversal marks a sudden halt to the AI-driven equity rally that defined much of 2026. Investors are increasingly questioning whether the massive capital expenditure planned for AI infrastructure can justify the sector's stretched valuations. Heavy investor positioning in momentum stocks has amplified the downward move as markets trigger broad profit-booking.
Specific catalysts accelerated the decline. Chinese AI startup Moonshot recently unveiled what it described as the world's largest open-weight AI model, raising doubts about the competitive landscape and future returns for major US technology firms. Additionally, Alphabet is facing delays in launching its flagship Gemini 3.5 Pro model, according to a Bloomberg report.
The selloff has also exposed underlying vulnerabilities in market structure. Goldman Sachs highlighted rising leverage across retail margin borrowing, leveraged exchange-traded funds, and short-dated options. Bank executives noted that several large hedge funds have recently trimmed their exposure to leading AI infrastructure companies after aggressively building positions earlier in the year.
The weakness spread well beyond US borders. South Korea's KOSPI also entered a bear market, Japan's Nikkei slipped into a correction, and European technology stocks retreated after posting their strongest quarterly performance since 2001 in June. Among individual movers on Friday, Applied Materials lost 5.6%, SanDisk dropped 4%, Nvidia fell 2.2% and Intel declined 2%.
However, derivatives markets indicate investors are rotating rather than fleeing equities entirely. Options activity on Friday showed renewed bullish positioning in names like SK Hynix, Micron Technology and SanDisk. SK Hynix's US-listed shares recovered to close modestly higher after briefly dipping below their offering price.
Market focus is now shifting to the upcoming earnings season. Quarterly results from Alphabet, Tesla and Intel will provide crucial data points on actual AI spending plans and semiconductor demand. These reports will determine whether the current correction is a temporary pause or the start of a broader reassessment of the AI investment cycle.
