U.S. chip stocks, a dominant force in the long-running bull market and central to the global AI computing power investment frenzy, faced one of their most challenging trading days of the year on Tuesday. For some of the market's top performers this year, particularly leaders in the chip sector who have staged a remarkable rebound since April following a sharp drop due to Middle East geopolitical tensions, this represented a dramatic reversal.
Hotter-than-expected inflation data, increasingly apparent U.S.-Iranian disagreements over resuming negotiations, and momentum trading indicators reaching extreme levels that have historically signaled sharp short-term sell-offs, combined to trigger a rare single-day plunge for the recently soaring chip stocks.
Major U.S. chip companies Broadcom (AVGO.US), Intel (INTC.US), and Micron (MU.US) were among the top five worst-performing components of both the S&P 500 and the Nasdaq 100, often seen as a bellwether for tech stocks. Meanwhile, the Philadelphia Semiconductor Index (SOXX), a global barometer for AI computing power trading and investment (up over 60% year-to-date), plummeted as much as 6.8% at one point, marking its largest single-day drop in over a year, before paring some losses to close down 3%.
U.S. April CPI surged 3.8% year-over-year, hitting a near three-year high, while core CPI growth expanded significantly to 2.8%. Both figures moved further away from the Federal Reserve's long-term 2% inflation target, shifting market bets on the Fed's policy path. On Tuesday, the S&P 500 retreated slightly from its record high, while the Philadelphia Semiconductor Index fell over 3%. The U.S. oil benchmark, WTI crude, jumped 4% to surpass $102, and yields across the U.S. Treasury curve rose notably.
As of Friday's close, the Philadelphia Semiconductor Index had rallied 11% for the week, marking six consecutive weeks of gains. It has soared nearly 250% from its April 2025 low. Measured by price-to-sales ratio, the index's valuation has reached a record high.
However, according to stock market bulls from Wedbush, Morgan Stanley, JPMorgan, and Yardeni Research, the global stock market frenzy driven by AI computing power investment is far from over. The recent pullback in U.S. and global equities is more likely a short-term technical shakeout and risk repricing process, rather than a trend reversal signaling the end of the bull market. Yardeni Research founder Ed Yardeni forecasts the S&P 500 to break above 8,000 by year-end and reach 10,000 within three years, emphasizing an earnings-driven "melt-up" trend. In contrast, the S&P 500 closed near 7,400 on Tuesday.
**Chip Stocks Drag Markets Lower, Momentum Bets Show Concerning Bearish Signs** Barry Knapp, Managing Partner at Ironsides Macroeconomics, stated: "This rapid decline undoubtedly makes investors nervous, prompting prudent risk management like taking some profits after such strong gains. However, I don't see any fundamental factors that would lead me to believe the earnings expansion narrative, driven by the massive wave of AI computing infrastructure build-out, will slow in any meaningful way."
As the chart shows, U.S. chip stocks broadly corrected sharply—the index fell on Tuesday but remains on a strong upward trajectory for the year. The sector has consistently benefited since 2023 from unprecedented heavy investment by global tech giants in AI computing infrastructure. Core hardware infrastructure like chips—especially those processing massive AI training/inference workloads and enabling vast data storage—are arguably the most critical part of AI infrastructure build-out.
According to financial giants like Morgan Stanley, the dominant narrative in global stock markets around AI computing investment is shifting from a "single-point computing power race around AI GPU/TPU (AI ASIC)" to "AI agent-driven full-stack AI systems."
Year-to-date 2026, Intel (INTC.US) shares have skyrocketed 227%, and U.S.-based memory chip giant Micron (MU.US) has surged 169%. Both rank among the S&P 500's six best-performing stocks this year.
Chris Murphy, Co-Head of Derivatives Strategy at Wall Street firm Susquehanna International Group, said: "The historic rally in chip giants benefiting from the AI computing power trade theme cannot continue indefinitely. This sell-off was overdue, but given the persistent 'fear of missing out' (FOMO) in the market, the pain may be short-lived."
Some investors are betting the selling will continue, at least in the near term. The Direxion Daily Semiconductors Bear 3x ETF (ticker SOXS), which provides triple-leveraged inverse exposure to the Philadelphia Semiconductor Index, rose 9.2%. Trading volume for call options on this triple-leverage short semiconductor ETF surged to 292,000 contracts by Tuesday afternoon, representing an aggressive and likely unavoidable near-term bet against chip stocks.
Dec Mullarkey, Managing Director at SLC Management, noted: "The decline was very broad, suggesting some investors may be taking profits ahead of the critical U.S.-China meetings this week. Since chips are a core topic in U.S.-China negotiations/competition, reducing exposure can preserve some 'ammunition' for potential post-meeting volatility."
Louis-Vincent Gave, CEO of Gavekal Research, wrote in a report that the upcoming U.S.-China summit is one reason for investor caution towards the semiconductor sector. The analyst noted the Trump administration urgently needs to replenish U.S. rare earth reserves, while a key Chinese demand is securing procurement rights for high-end chip manufacturing equipment. Dutch semiconductor equipment giant ASML, producer of EUV lithography machines for advanced chips, has long been barred from selling related equipment to China.
Gave wrote: "Undoubtedly, a 'rare earths for ASML lithography machines' deal would open the door to future chip price declines. Winners of the AI computing build-out wave, including Intel, TSMC, SK Hynix, and Samsung Electronics, would lose some pricing power."
Almost every component of the semiconductor index closed lower. Chip giant Qualcomm (QCOM.US), which had surged 60% over ten days recently as it shifts from a smartphone focus towards data center CPUs, led the decline with a 12% drop. The only chip stock to close higher was NVIDIA (NVDA.US), with a market cap exceeding $5 trillion. However, this AI chip leader's year-to-date performance has lagged the broader U.S. market.
NVIDIA, the global AI chip superpower often dubbed "the world's most important stock," is expected to report its Q1 2026 calendar year results next week. This highly anticipated earnings report could serve as another catalyst for the global tech sector and the "AI bull market narrative" driving the global equity bull market trajectory.
Jonathan Krinsky, Chief Market Technician at BTIG, wrote in a client note on Tuesday: "We may see an equal and opposite reaction to the parabolic move in tech/semiconductor/AI momentum names over the past few weeks." He warned the semiconductor index could fall about 20%, as the current rally appears severely overbought on some core momentum indicators.
Strategists at Wall Street giant Barclays stated that momentum indicator gains have reached extreme levels that have historically presaged sharp short-term sell-offs. Goldman Sachs' trading desk wrote this week that based on prime brokerage data, valuations for the highest-momentum stocks are overstretched, with market positioning among the highest in recent years.
In the context of Wall Street institutions, momentum trading isn't based on a few technical indicators. It employs custom quantitative models using metrics like relative strength, past 6–12 month returns (excluding the most recent month's reversal effect), volatility adjustment, sector neutrality, risk models, crowding, fund flows, and volume signals to drive so-called momentum trading strategies or factors.
**A Brief Pause in the Grand "AI Bull Market" Narrative?** Despite this, many Wall Street professional strategists are not ready to abandon chip stocks and other leaders in the AI computing power investment theme. They argue these stocks' fundamentals remain strong, underpinned by massive AI investment spending.
Rhys Williams, Chief Strategist at Wayve Capital Management, said: "I think the bulls will still dominate unless there's a clear reversal. As long as investable opportunities aren't widespread in other market sectors, significant capital will continue flowing into this one."
The Philadelphia Semiconductor Index has led gains since April due to the intense AI computing infrastructure build-out and exploding demand for data center CPUs and memory chips. However, technical overheating from rapid gains prompted short-term capital to take profits. This is a common "momentum correction signal" in technical analysis, not a sign of deteriorating fundamentals. Investor risk management and position adjustments often trigger brief pullbacks after strong sector rallies.
Internal market momentum benchmark indicators have shown extreme upward momentum, which itself increases the probability of a short-term correction. However, such momentum-driven dips are often technical consolidations before a trend continuation, not decisive evidence of a medium-to-long-term trend reversal.
Market panic wasn't triggered by earnings declines but by capital anxiety adjusting and repricing at high levels. Therefore, the medium-to-long-term trend remains driven by fundamental factors like AI-driven earnings growth, the AI infrastructure capital expenditure cycle, and a normal liquidity environment.
The short-term pullback is also related to recent high oil prices, rising inflation, and escalating geopolitical risks. These exogenous factors affect market expectations for future policy (e.g., the Fed's rate path), prompting near-term capital adjustments. Recent oil price increases and potential inflationary pressures have significantly heightened market concerns about policy uncertainty, leading momentum-focused quantitative funds to sharply reduce bets on high-valuation sectors. However, such corrections typically represent near-term adjustments in pace, valuation corrections, and risk repricing, not a deterioration in fundamentals, but a normal consolidation within a mid-bull market phase.
Hedge fund legend Paul Tudor Jones stated that the AI-driven U.S. stock bull market hasn't peaked yet, and the current stage of AI technology development is comparable to the early commercialization of the internet in 1995. He predicts this AI super bull market has completed about 50% to 60% of its journey and "could last another year or two." Jones said he has increased his exposure to AI assets, diversifying through a "basket" approach, reflecting a strategy of balancing growth opportunities with risk management in a bull market.
Since 2026, stocks related to leaders in the AI computing power supply chain have become the main engine for the significant gains in the S&P 500, Nasdaq indices, and global stock markets. The core logic is that as AI application users from companies like Anthropic and OpenAI exhibit nearly insatiable demand for AI computing power, investor bullish sentiment continues to heat up for AI computing "critical bottlenecks," including core infrastructure like GPUs, CPUs, memory chips, and optical communications. Wall Street analysts widely believe these bottleneck effects will persist at least until 2027, supporting the continued strong run of this global tech stock bull market.
Wall Street's prominent bull, Ed Yardeni, founder of Yardeni Research, forecasts the S&P 500 to break above 8,000 by year-end and reach 10,000 within three years, emphasizing an earnings-driven "melt-up" trend. Institutions like HSBC and CFRA have also raised their price targets, viewing profit expansion around AI applications and AI computing infrastructure as the core driver.
Wall Street giant JPMorgan has significantly raised its target for South Korea's benchmark Kospi Composite Index twice within a month. The core logic is undoubtedly that the bull market story, driven by the AI infrastructure frenzy and a "memory chip super cycle," is far from over. The largest U.S. commercial bank raised its base target for the Kospi to 9,000 and its bull scenario target to the epic 10,000 level, implying a potential 33% upside from last Friday's close. In contrast, the base and bull targets set in late April were 7,000 and 8,500, respectively.
Comments