The release of the new Kimi K3 model has reignited market concerns over the return on AI capital expenditure and the sustainability of chip demand, triggering a sell-off in the high-valuation, crowded AI sector.
Simultaneously, renewed hostilities between the US and Iran on Friday elevated risks to energy supplies, pushing oil prices higher and creating a split market dynamic where technology stocks led declines while energy shares strengthened.
On Friday, the Philadelphia Semiconductor Index fell 1.6%, marking a 20% decline from its record high and entering bear market territory. The chip stock sell-off dragged the Nasdaq 100 Index down 1.5%, the S&P 500 down 1%, and the Dow Jones Industrial Average down 0.8%.
The escalation in US-Iran conflict pushed WTI crude oil up 4.3% to $82.34 per barrel. The sharp rise in oil prices did not trigger a simultaneous sell-off in long-term US Treasuries, with the 10-year yield remaining largely flat at 4.55%, indicating the market has not yet fully translated the energy shock into persistent inflation expectations.
AI Investment Thesis Under Scrutiny as Chip Fears Persist
Chip futures fell sharply ahead of Friday's market open, leading to a panicked sell-off in the AI hardware supply chain upon opening.
The release of Moon's Dark Side's new Kimi K3 model, with its low-cost, open-source strategy, has once again shaken the market's core assumptions about massive AI computing investment, causing global technology and semiconductor stocks to plummet as fears of a "DeepSeek moment" replay spread rapidly among investors.
Although the memory chip sector saw a slight intraday rebound and AI software infrastructure stocks held relatively firm, panic sentiment dominated trading throughout the session.
Within the AI sector, performance diverged under the Kimi impact, with AI semiconductors and data centers significantly underperforming, while AI software remained relatively resilient.
Trading experts from Goldman Sachs' TMT desk noted a significant increase in investor anxiety over the past 48 to 72 hours, with growing unease surrounding the ongoing correction in AI and semiconductors.
Since its late June peak, the Philadelphia Semiconductor Index has underperformed the broader market by approximately 20 percentage points, posting its worst weekly performance since April 2025 this week.
Looking at the options market, major semiconductor ETFs saw extreme bearish demand this week, with the put-call volume ratio exceeding 3, far above historical averages. The MenthorQ model detected simultaneous momentum breakdowns in major semiconductor stocks, with overall options sentiment deteriorating and support levels being widely breached.
A deeper issue is the brewing concern over an AI investment boom-bust cycle. The US Commerce Department's BIS annual report has already warned of boom-bust cycle risks in AI investment.
Previously, although TSMC raised its capital expenditure, the market interpreted it negatively, viewing capacity expansion as signaling future oversupply. Divergent views from institutions like Barclays and BBH on the return on investment for AI hardware have further intensified market anxiety.
Nomura's Charlie McElligott summarized that all effective strategies this year are reversing, and any further deterioration could trigger a correlation-1 sell-off, forcing longs to liquidate and shorts to increase their positions.
In a negative gamma environment, dealers are forced to chase weakness, turning the sell-off into a mechanical feedback loop. The momentum index is currently testing a head-and-shoulders top technical pattern.
The ratio of the Philadelphia Semiconductor Index to the S&P 500 has fallen to a key support level.
US-Iran Conflict Escalation Sends Oil Prices Soaring, Filling Ceasefire Gap
The Middle East situation deteriorated further on Friday. The US conducted airstrikes on Iran for the sixth consecutive day, targeting Iranian missile and drone facilities as well as defensive positions. In retaliation, Iran attacked water and electricity facilities in Kuwait.
According to a report from Xinhua citing an Iranian military statement, Iran announced strikes on US military bases in Kuwait and US targets in Syria's At Tanf on Friday, July 17. Media noted this marks the first time since the regional war began this year that Iran has publicly revealed direct strikes on targets within Syria.
Geopolitical escalation drove a sharp rise in crude oil. WTI crude climbed above $82 on Friday, hitting a one-month high and fully retracing the losses incurred since the ceasefire gap opened approximately a month ago.
WTI crude has filled the ceasefire gap, posting its largest weekly gain since the war began.
Spot Brent crude prices returned above $84.60, touching a five-week high. Crude oil recorded its largest weekly gain since the outbreak of the war.
The refined products market is also tight. US and European diesel markets are experiencing record supply tightness, with crack spreads surging to historical highs and refining margins becoming highly profitable.
This supply chain mismatch, with ample crude but downstream bottlenecks, benefits refiners in the short term but keeps energy costs elevated, potentially creating ripple effects on inflation and economic growth.
Goldman Sachs energy analyst Privorotsky warned that this represents a meaningful escalation, creating a more complex risk backdrop heading into the weekend, making defensive stocks begin to look like they offer an asymmetric risk-reward profile.
European natural gas futures also jumped significantly this week, hitting their highest level since March, on concerns over LNG carrier transit through key waterways.
US Treasury Yields Show Distorted Pattern as Rate Hike Expectations Collapse
The US Treasury market exhibited a clear divergence in performance on Friday.
As oil prices rose, the 2-year yield climbed sharply during the US stock trading session, but medium to long-term yields fell throughout the day. The spreads between the 2-year and 10-year, and the 5-year and 30-year, approached their flattest levels of the year.
This contrasted sharply with the market action during the first four trading days of the week. Previously, influenced by cooler-than-expected CPI and PPI data, the Treasury market experienced a "bull flattening" move, where yields across the curve fell, with long-end yields falling more than short-end yields, causing the curve to flatten.
For the entire week, Treasury yields moved lower across the curve, led by the front end. The implied probability of a July rate hike has fallen to just about 2.5 basis points, essentially priced out of the market, while a September hike is now seen as only a coin toss.
Cooler-than-expected CPI and PPI data this week, along with lower-than-expected Michigan inflation expectations, have forced the market to reprice duration risk.
Bloomberg analysts pointed out that although WTI crude prices rose sharply this week, the Treasury market not only didn't fall but actually rallied. This contrasts sharply with the traditional negative correlation logic seen early in conflicts, where rising oil prices spark inflation fears, leading to bond sell-offs.
Now, market participants' trading habits have also changed: they are no longer selling into price rallies to take profits but are actively buying during price declines.
However, UBS Asset Management's Kevin Zhao plans to short US Treasuries, betting that a strong US economy will erode the safe-haven appeal of government bonds.
A Review of the Week: A Horrific Week for Tech Stocks
If one only looks at the surface of the indices, the US stock market didn't seem too bad this week, with small-cap stocks and the Dow also closing the week lower but performing relatively better. However, technology stocks suffered their worst week of the year.
Semiconductor volatility surged to the 92nd historical percentile, reaching extreme levels seen during the dot-com bubble. The emergence of Kimi was merely the final straw that broke the camel's back.
Amid the tech stock collapse, a completely different story is unfolding. The S&P 500 Equal Weight Index hit a record high this week, intensifying its divergence from the market-cap-weighted index. This is not a comprehensive defensive sell-off but a structural migration of funds between sectors.
Bloomberg macro strategist Michael Ball noted that healthcare, financials, industrials, and transportation sectors are taking over leadership from the technology sector.
Goldman Sachs TMT trading experts summarized it as an exhausting week. However, amidst the ruins of the semiconductor crash, cybersecurity and data infrastructure software stocks held firm, with CrowdStrike rising 9% and Palo Alto Networks gaining 10% this week.
Bulls believe these sectors will benefit in the AI inference era and are less dependent on semiconductor bottlenecks or model leaderboards.
Movements in Other Major Asset Classes
The US dollar experienced volatile movements this week but ultimately closed lower.
The cost of hedging against dollar volatility has fallen to its lowest level this year, suggesting that despite an unclear Fed outlook and renewed Middle East conflict, traders see little chance of a major catalyst disrupting the world's reserve currency.
Despite dollar weakness, gold prices continued to decline, struggling to maintain the $4,000 per ounce level.
On Friday, the S&P 500 fell 1%, and the Nasdaq 100 fell 1.5%. The Philadelphia Semiconductor Index fell 1.6%, down 20% from its record high, reaching the bear market threshold. The US stock memory chip index fell over 17% this week, retracing more than 31% from its closing all-time high.
US Benchmark Indices
The S&P 500 Index closed down 76.08 points, or 1.01%, at 7,457.69 points, falling 1.55% for the week.
The Dow Jones Industrial Average closed down 406.55 points, or 0.77%, at 52,146.42 points, falling 0.93% for the week.
The Nasdaq Composite Index closed down 361.703 points, or 1.40%, at 25,520.244 points, falling 2.90% for the week. The Nasdaq 100 Index closed down 433.111 points, or 1.49%, at 28,592.659 points, falling 4.13% for the week.
The Russell 2000 Index closed down 0.42% at 2,962.217 points, falling 0.52% for the week.
The CBOE Volatility Index (VIX) closed up 12.01% at 18.74, rising 24.68% for the week. After gapping higher and stabilizing around 16.50 on July 13, it gapped higher again on July 17.
US Sector ETFs
US sector ETFs were mostly lower. The Global Airlines ETF fell 2.53%, the Semiconductor ETF fell 2.18%, the Consumer Discretionary ETF fell 1.62%, and the Regional Banking ETF pulled back 1.58%. The Global Tech Index ETF, Internet Index ETF, and Technology Sector ETF fell up to 1.31%. The Energy Sector ETF gained 1.16%.
Chip Stocks
The Philadelphia Semiconductor Index closed down 193.615 points, or 1.63%, at 11,673.889 points, marking a retreat of over 20.23% from its closing record high of 34,634.720 reached on June 22—entering bear market territory. It fell 9.97% for the week.
The US Stock Memory Chip & Hardware Supply Chain Index fell 0.77% to 189.38 points, marking a cumulative retreat of over 31.12% from its closing record high of 274.95 reached on June 22. It fell 17.61% for the week, remaining in decline throughout the period.
Among components, Applied Materials closed down 5.57%, SanDisk fell 3.99%, Lam Research fell 2.39%, and Micron Technology fell 0.50%. Teradyne and Rambus each gained 0.02%, while Western Digital rose 2.23% and Seagate Technology jumped 5.66%.
Chinese Stocks Listed in the US
The Nasdaq Golden Dragon China Index closed down 1.81% at 6,280.72 points, rising 2.61% for the week after sustained gains on July 15-16.
Among popular Chinese stocks, Baidu closed down 4.8%, Meituan, XPeng, Tencent, and Li Auto fell over 3%, Pinduoduo, ASE Technology Holding, and Alibaba fell over 2%. NetEase gained 0.7%, Canadian Solar rose 1.5%, Daqo New Energy rose 2.2%, and JinkoSolar rose 3.1%.
Other Individual Stocks
Circle fell 0.21%, falling 8.51% for the week.
European Stocks
European stock ASML closed down over 3.8%. For the week, the European oil & gas sector rose over 3.6%, while the technology sector fell about 3.3%. The Italian banking sector closed down over 1.9%. For the week, the German stock market fell over 0.9% and the Italian index fell about 1.4%.
Pan-European Indices
The Europe STOXX 600 Index closed down 0.34% at 641.53 points, rising 0.07% for the week.
The Euro STOXX 50 Index closed down 0.84% at 6,230.87 points, falling 0.62% for the week.
National Indices
Germany's DAX 30 Index closed down 0.34% at 24,830.98 points, falling 0.94% for the week in a sustained decline.
France's CAC 40 Index closed down 0.47% at 8,338.81 points, falling less than 0.01% for the week.
The UK's FTSE 100 Index closed up 0.27% at 10,600.37 points, rising 0.98% for the week.
Sectors and Stocks
Among Eurozone blue-chips, Prosus closed down 4.75%, ASML Holding fell 3.84%, financial stocks Deutsche Bank fell 2.67%, UniCredit fell 2.48%, Adyen fell 2.45%, and Banco Bilbao Vizcaya Argentaria fell 2.35%.
Among all components of the Europe STOXX 600 Index, AAK closed down 13.03%, Sandvik fell 9.33%, AT&S fell 7.22% for the third-largest decline, Burberry fell 6.38%, and BE Semiconductor Industries fell 4.53%, ranking among the top decliners.
For the week by sector, the STOXX 600 Oil & Gas Index rose 3.65%, the Personal & Household Goods Index rose 2.64%, the Automobiles & Parts Index rose 1.17%, the Food & Beverage Index rose 1.15%, and the Personal Care, Drug & Grocery Stores Index rose 1.97%.
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