Key Takeaways:
The semiconductor selloff has erased 20% from chip indexes in seven weeks, marking the fastest drawdown since the April 2025 tariff rout.
The iShares Semiconductor ETF (SOXX) has plunged 20.3% from its June 2 peak, entering bear market territory as a convergence of Chinese AI competition, forced Korean leverage unwinding and crowded momentum trades triggered the worst selloff in the sector since the April 2025 tariff rout.
"The surface stayed calm while the engine broke," Ed Yardeni, president of Yardeni Research, said in a note, highlighting the divergence between the S&P 500's 2% drawdown from its all-time high and the 20% collapse in semiconductor stocks beneath the surface.
The damage extends well beyond the SOXX. The Roundhill Memory ETF (DRAM), which launched in April and peaked at $80.72 on June 22, has fallen roughly 35% since then. The Bloomberg momentum index dropped 13% from its June technology peak, turning one of its strongest months into one of its ugliest reversals. The VanEck Semiconductor ETF (SMH) fell nearly 9% last week alone, its worst single-week performance since March 2025.
The selloff has not yet run its course, according to Yardeni, who warned the S&P 500 Semiconductors index is likely to fall another 12% to its 200-day moving average. Dan Niles of Niles Investment Management told CNBC that semiconductor names, while down significantly, are not yet oversold — suggesting further downside before a sustainable bottom forms.
The trigger for the latest leg lower came from an unexpected direction. Chinese AI lab Moonshot launched Kimi K3, a 2.8-trillion-parameter open-weight model that the company claims rivals top-tier models from OpenAI and Anthropic. The release revived DeepSeek-era fears that highly capable AI models can be built far more cheaply than the American hyperscaler blueprint assumes, challenging the core investment thesis that better AI always requires more chips, more power and more capital.
"Kimi mattered because it challenged the assumption that better AI must always require more chips, more power and more capital," Stephen Innes of SPI Asset Management wrote in a note. Cheaper models may accelerate adoption while weakening the scarcity premium embedded in semiconductor valuations.
The selloff was amplified by a structural unwind in Korean markets. Heavy margin calls on South Korean tech giants Samsung and SK Hynix triggered forced selling that rippled through US memory chip and semiconductor equities. Higher margin requirements and restrictions on new leveraged products in Korea confirmed that leverage had become embedded in the market structure, accelerating the decline once the trend broke.
Wall Street remains divided on the bottom
Morgan Stanley argued the selloff has created an attractive entry point, naming Nvidia Corp. (NVDA) and Broadcom Inc. (AVGO) as its top picks in AI compute while identifying memory stocks as a "compelling entry point" after their recent pullback. Mizuho's Vijay Rakesh said there is still "a lot of gas left in the tank," citing AI capital expenditures, expanding gigawatt-scale power deployments and a persistent supply gap that should support semiconductor demand beyond 2028.
JPMorgan echoed that view, saying semiconductor stocks "should soon start to find a bid" because additional supply is unlikely to materially alter the industry's supply-demand balance before 2028.
Goldman Sachs, however, reported that hedge funds pulled back from US tech stocks at a record pace over the past two months, with net selling in six of the previous eight weeks. The divergence between Wall Street's long-term bullishness and the speed of institutional de-risking highlights the uncertainty around near-term valuations.
Rotation gains momentum as energy, financials benefit
Capital is rotating out of the most crowded technology names and into sectors that have been relative laggards. Yardeni Research maintains an overweight rating on Financials and Health Care, sectors that have weathered the recent storm. The Energy Select Sector SPDR (XLE) advanced 1.2% on Friday even as the broader market sold off, as oil prices recorded their strongest weekly rise since the war began and Brent crude crossed $90 a barrel.
The rotation requires a delicate macro backdrop to sustain itself. Cooling inflation and falling Treasury yields offered the AI trade a brief reprieve earlier in the week, but rising energy prices threaten to push bond yields higher just as investors become less willing to excuse the industry's spending habits. Cover ratios for hyperscaler bonds have fallen from nearly 5x in February 2026 to below 2x in July, suggesting investors may demand wider spreads to absorb additional supply.
For investors, the key question is whether the selloff represents a buying opportunity or a structural repricing. Nvidia shares, which fell 2.2% on Friday to $202.81, have held up better than the broader semiconductor complex. But with the Nasdaq Composite down 1.4% on Friday to 25,520 and the CBOE Volatility Index jumping 12.2% to 18.77, the path of least resistance remains lower until earnings season provides a catalyst.
Google opens the hyperscaler earnings proceedings, followed by Micron, SK Hynix and Advanced Micro Devices. Management teams will need to show that the capital expenditure machine is producing visible returns rather than merely consuming larger amounts of cash. The AI boom has not been disproven, but the market has stopped treating it as self-proving.
This article is for informational purposes only and does not constitute investment advice.
