AI chip stocks enter bear market amid profit-taking, capex doubts
The Philadelphia Semiconductor Index has fallen more than 20% from its peak as investors scrutinize the return on massive artificial intelligence spending and lock in profits from this year's massive rally.
The Philadelphia SE Semiconductor Index dropped 1.6% on Friday, pushing it more than 20% below its late-June all-time high and confirming a bear market. The benchmark suffered a roughly 10% weekly decline, its steepest in over a year. The sudden reversal has abruptly stalled the AI-driven momentum trade that dominated global equity markets for the first half of 2024.
Despite the severity of the recent drawdown, the sector's foundational gains remain intact. The semiconductor index is still up more than 60% for the year, illustrating that the current selloff is a sharp repricing rather than a structural collapse. Leveraged products reflect this volatility acutely; the Direxion Daily Semiconductor Bull 3X ETF has plummeted more than 50% from its June peak, though it retains a year-to-date gain of over 200%.
The retreat was triggered by fresh doubts regarding the timeline for returns on massive AI infrastructure investments. Chinese AI startup Moonshot introduced what it called the world's largest open-weight AI model, intensifying investor scrutiny over whether U.S. tech giants can justify their heavy capital expenditure. Separately, a Bloomberg report indicated Alphabet's Google is months behind schedule on releasing its flagship Gemini 3.5 Pro model.
The contagion has spread well beyond U.S. chipmakers to global momentum trades. The S&P 500 Momentum Index, which outperformed the broader benchmark by more than two-to-one earlier this year, has fallen 11% in July compared to a less than 1% dip in the S&P 500. International markets mirrored this shift, with South Korea's KOSPI entering a bear market, Japan's Nikkei slipping into correction territory, and European tech stocks retreating after posting their best quarterly jump since 2001 in June.
Market professionals attribute the shift primarily to portfolio mechanics rather than deteriorating corporate fundamentals. "I don't think it has really anything to do about fundamentals as much as just repositioning of portfolios and just taking profits in stocks that have gone crazy," said Chuck Carlson, chief executive officer at Horizon Investment Services.
However, the speed of the sector's ascent left valuations exposed to any shift in sentiment. "The pullback reflects profit-taking and rising scrutiny of AI capex sustainability," said Toni Meadows, head of investment at BRI Wealth Management. "Valuations in semiconductor stocks had priced near-perfect demand, for what has been a cyclical area in the past, so was always going to leave stocks vulnerable at some point in what has been a rapid rise."
