The selling pressure in the global semiconductor sector continues unabated.
Despite the South Korean market being closed for a holiday on Friday, the global chip sector remained under pressure. During the Asia-Pacific trading session, Japan's semiconductor stocks plunged sharply, and the US Philadelphia Semiconductor Index failed to mount a recovery, sinking into technical bear market territory, with SanDisk suffering a near 30% weekly decline. The heavy selling in Asian markets has resulted in significant losses this week for South Korea's retail investors, colloquially known as the "ant army." A staggering 1.2 million retail investors received margin calls, a figure representing over 3% of South Korea's total adult population, highlighting the speculative frenzy in the local market and the substantial risks inherent in leveraged trading. Goldman Sachs trader Yannis Blakos disclosed this data in a client trading briefing on Thursday, adding that approximately 350,000 retail accounts were liquidated this week alone during the sharp decline of the KOSPI index. The market closure in South Korea on Friday for Constitution Day offered fund managers a brief respite, but the selling wave triggered by the Korean market slump has spread to other global markets.
In Japan, the domestic core semiconductor leader and former market favorite, Kioxia Holdings, led the declines, plummeting 16% in a single day. Kioxia had only recently become Japan's most valuable company this year, but its share price has halved over the past month. Other companies in the chip supply chain, including Ibiden, Tokyo Electron, and Sumitomo Metal Mining, saw declines ranging from 8% to 10%. This follows Taiwan Semiconductor Manufacturing Company's (TSMC) release of its Q2 earnings on Thursday, which significantly exceeded expectations and included a raised outlook. However, even this positive news failed to stem the downward pressure, with its shares closing down 7%.
Analysis reveals that many institutions believe the collective collapse in sector sentiment stems more from crowded positioning and capital flows than a deterioration in industry fundamentals. Beyond TSMC, ASML also recently delivered exceptionally strong earnings; chip manufacturers generally indicate that medium-to-long-term supply continues to lag behind demand. Independent analyst Stephen Innes, commenting on TSMC in his subscription column, stated: "When good news can no longer lift share prices, the market is no longer trading on fundamental news but rather on the selling pressure from massive existing profit-taking positions. The situation in the Korean market fully illustrates that once leverage, margin calls, and market volatility form a negative feedback loop, a normal correction can rapidly evolve into a mechanical, stampeding sell-off."
However, the market is beginning to show some positive signals. Citigroup's weekly "Fund Flow Insights" report released on Friday showed net inflows of $6.4 billion and $2.8 billion into semiconductor-related ETFs in South Korea and Taiwan, China, respectively, this week. After months of significant foreign capital outflows from the South Korean stock market, this week actually saw $500 million in foreign inflows, indicating a potential positive reversal in capital flows.
Philadelphia Semiconductor Index Enters Bear Territory
Following a surge earlier this spring, the US chip sector has fallen into a technical bear market. According to Dow Jones Market Data, the Philadelphia Semiconductor Index (SOX), a benchmark comprising 30 leading US chip companies, fell 21% from its June 22nd all-time high on Friday. The commonly accepted standard for a bear market is a decline of at least 20% from a recent peak.
Recent signals indicate another shift in market leadership within US stocks. Strong bank earnings propelled the S&P 500 financial sector to a second consecutive record closing high on Thursday; the Dow Jones Transportation Average is up over 30% year-to-date, nearing its historical high, and the SPDR S&P Retail ETF closed at its second-highest level since early 2022. David Royal, Chief Investment and Financial Officer at Thrivent Funds, noted: "It's a very healthy sign to see market strength broadening out to multiple sectors. Recent employment and retail sales data are also sending positive signals." He added, "Consumers need confidence in the job market to make big-ticket purchases like cars."
Historically, chip stocks have exhibited higher volatility than the broader market. Dow Jones Market Data statistics show that over the past decade, the Philadelphia Semiconductor Index has experienced six corrections exceeding 20% and 31 pullbacks of more than 10%. In comparison, the S&P 500 index had only two declines over 20% and eight over 10% during the same period. Notably, some of the 10%+ corrections occurred within broader bear market cycles.
Kevin Gordon, Director of Macro Research and Strategy at the Schwab Center for Financial Research, described the recent chip sector activity: "The sector's heat was a brief party, and sometimes the tide goes out quickly, but it can also come back in quickly." He believes the current correction reflects both profit-taking by investors and a broader capital rotation away from the chip sector. "Looking at past major sell-offs, market memory is very short. I don't view this decline as an extremely dangerous warning signal."
Upcoming earnings reports will be a critical variable. Wall Street expects S&P 500 component companies to report a 23.6% year-over-year increase in annualized Q2 net profits, with the semiconductor and related equipment sector projected for a staggering 131% earnings growth. David Russell, Global Market Strategist at TradeStation, poses the question: "The tech sector's earnings are strong now, but can this high growth be sustained one to three quarters from now?" He stated, "The momentum in tech stocks has faded. The market is beginning to question the sustainability of the chip industry's long-term high-growth narrative and whether chip stocks have already priced in growth expectations for several years ahead. Consequently, capital is being reallocated to other sectors with favorable narratives in an improving economic environment."
According to exchange schedules, the earnings reports from the first batch of mega-cap chip manufacturers are still some time away. The market will be closely watching the results from Alphabet, Google's parent company, due next Tuesday.
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