The single-direction semiconductor rally that has largely dictated stock market trends this year is now unraveling, triggering unsettling and intense volatility as investors grow increasingly concerned that the artificial intelligence spending spree may not be sustainable. The Philadelphia Semiconductor Index tumbled 21% in July, marking its worst monthly performance since the height of the global financial crisis in October 2008.
Nearly half of the trading days last month saw the index, which tracks the 30 largest chip manufacturers worldwide, close with swings of at least 4%. All 22 trading sessions recorded intraday fluctuations of at least 2%, a pattern not seen since 2020. Stephen Evans, Chief Investment Officer at Pave Finance, commented, "This volatility truly reflects the widespread uncertainty currently at play. No one knows exactly how things will unfold." He added, "I believe the current chip cycle still has room to run, and investors can maintain long positions. However, you must be prepared for a ride akin to a Disneyland roller coaster."
The heightened volatility largely stems from a more rigorous examination of capital expenditure plans by major tech firms, with questions arising about the sustainability of such spending. Combined with intensifying competition and the growing prevalence of open-source AI models—which operate at lower costs, higher efficiency, and require less infrastructure—investors are beginning to suspect that the heyday for chip stocks may have passed. Despite a two-day rebound of 8.3% in chip stocks at the end of July, the Philadelphia Semiconductor Index remains 23% below its record high set on June 22. All components of the index have posted declines during this period, with over half suffering cumulative drops of at least 25%.
Some investors view the recent sell-off as excessive, creating opportunities for short-term bargain hunting. Yet, the long-term outlook for chip stocks remains uncertain. Charles Lemonides, Chief Investment Officer at Valueworks, stated, "I wouldn't be surprised if we see a fairly strong rebound in chip stocks after this sell-off. However, I don't think they are likely to lead the next phase of the bull market. Their prime time has passed." The shockwaves from July's sharp downturn in the AI sector are already materializing. A hedge fund named Situational Awareness, managed by Leopold Aschenbrenner, was forced to sell billions of dollars in tech stocks to meet margin calls after its heavily concentrated positions rapidly lost value. The fund had invested in companies tied to the AI boom, including semiconductor manufacturer Sandisk (SNDK.US)—which saw its market value nearly halve in July after surging 858% in the first half of the year.
Clearly, in the face of such gains, investors are cashing in on stocks that have doubled, tripled, or even quadrupled this year. But the abrupt shift in investor sentiment indicates growing doubt about the core logic driving this rally. Despite this, industry growth prospects for the coming year remain optimistic, with analysts expecting earnings at companies like Nvidia (NVDA.US) and Broadcom (AVGO.US) to continue expanding. Last week, Amazon (AMZN.US) and Microsoft (MSFT.US) reaffirmed their commitment to spending hundreds of billions of dollars on AI over the next year, with a substantial portion flowing to manufacturers of chips used in data centers. The problem lies in the fundamental picture beyond that horizon.
Chip stocks, particularly those in memory chips, have historically been strongly cyclical, rising and falling with demand fluctuations. Many on Wall Street remain convinced that this cycle will be no exception. Lemonides of Valueworks noted, "The explosive earnings growth we are witnessing is fundamentally unsustainable." He added, "The bigger question is whether profit margins can be maintained. Current margins have deviated significantly from historical norms, making a correction a reasonable expectation. The only question is when it will happen and how the stock market will react." The following three charts capture the tumultuous month for chip stocks:
Volatility Surges
The Philadelphia Semiconductor Index's 60-day realized volatility measure has spiked to its highest level since the onset of the COVID-19 pandemic. Over the past two decades, only the global financial crisis has reached similar heights.
Market Value Eroded
The July sell-off erased $2.2 trillion in total market capitalization from the Philadelphia Semiconductor Index. Among the hardest hit was Taiwan Semiconductor Manufacturing Co. (TSM.US) ADR, which fell 15% in July, losing over $380 billion in market value—despite raising its spending and revenue outlook in mid-July. Following closely was Micron Technology (MU.US), which suffered a 29% decline, its worst monthly drop in over a decade, wiping out $374 billion in market cap. Intel (INTC.US) plunged 35% during the month, with its market value shrinking by approximately $247 billion, marking its steepest monthly decline since September 2000. Notably, performance diverged significantly among chip stocks, with some leaders like Nvidia and Broadcom actually posting gains for the month.
Retail Investors Buy the Dip
According to statistics, the extreme volatility in chip stocks has triggered historically high trading activity among retail investors. In just the last week of the period, individual investors poured a record $12 billion in net inflows into semiconductor-related exchange-traded funds. Analyst Eric Balchunas wrote, "Semiconductor ETFs have never seen such levels in either fund flows or trading volume. The $12 billion inflow is not only a record but also accounts for 25% of all ETF net inflows over the past five days, despite semiconductor ETFs making up only 1% of total ETF assets." Among these, a fund focused on memory chip manufacturers and a three-times leveraged semiconductor fund were particularly popular.
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