Chip stocks were hammered on June 5, 2026, with the semiconductor sector suffering its steepest decline since April 2025, as quoted on Yahoo Finance. The slump has erased more than $1 trillion in market value as investors rapidly unwind positions tied to the AI boom.
VanEck Semiconductor ETF SMH lost 9.2%, Invesco QQQ Trust, Series 1 QQQ retreated 4.8%, State Street SPDR S&P 500 ETF Trust SPY slipped 2.6% while Global X Artificial Intelligence & Technology ETF AIQ was off 8.2% on Friday.
The weakness is spreading beyond U.S. markets. The iShares MSCI South Korea ETF EWY has tumbled more than 11%, putting it on pace for its steepest one-day decline since March 2020, per Yahoo. With Samsung Electronics and SK Hynix making up a significant portion of the fund, EWY is serving as a real-time gauge of stress across the memory chip and AI supply-chain ecosystem.
Not a Broad Market Breakdown
The divergence in the market selloff suggests this is not a full-scale market sell-off. Instead, it appears to be a concentrated unwinding of one of the market's most crowded and high-flying trades. Notably, the 10 largest decliners accounted for about $923 billion of those losses, the Yahoo article noted.
What Led to the Slump?
The U.S. jobs data for the month of May came in hot. Nonfarm payrolls jumped a seasonally adjusted 172,000 in May, down slightly from the upwardly revised 179,000 in April and way higher than the Dow Jones consensus estimate for 80,000, as quoted on CNBC.
The unemployment rate held steady at 4.3%, as expected. Average hourly earnings rose 0.3% for the month and were up 3.4% over the past year, both in line with the Wall Street consensus, as reported by CNBC.
Such hot jobs report fueled Fed rate hike bets. This is especially true given that the inflation reached its highest level in three years and the Iran conflict continues. The Personal Consumption Expenditures (PCE) Index, the central bank's preferred inflation gauge, rose 3.8% year over year in April, up from 3.5% in March and marking the highest reading in three years.
Core PCE, which excludes food and energy prices, accelerated to 3.3% from 3.2%, signaling that underlying inflation pressures remain elevated.
If the Fed hikes rates ahead, that would spell trouble for growth sectors like semiconductors and information technology as their valuations depend on future earnings.
Is the Selloff Good?
Chip stocks have been rallying relentlessly, with SMH skyrocketing about 125% over the past one year and over 52% so far this year. So, any negative news will definitely act as a trigger for a selloff.
SMH ETF currently trades at a price-earnings ratio of 52.65X, much higher than the State Street SPDR S&P 500 ETF Trust SPY’s P/E of 27.91X – almost double. So, some sort of correction amid growing fears of Fed policy tightening is quite natural. It should correct the valuation of the fund or the sector as a whole.
Why to Buy the Dip if You Are Invested Yet
Demand for Chips Never-Ending While Supply Suffering currently
The modern world technology – be it AI or not – thrives on chips. Chips control everything from smartphones and household appliances to autonomous vehicles and power grids. AI has bolstered chip demand even more, with high-end GPUs powering large language models and cloud computing.
Note that NVIDIA NVDA – the behemoth behind the AI boom – and Microsoft MSFT have recently collaborated to launch a new class of Windows PCs and laptops powered by NVIDIA's "RTX Spark" processors. So, even amid the peak of the AI euphoria, NVIDIA has been partnering on non-AI ventures.
NVIDIA also has committed at least $6.5 billion over the past three months to companies developing photonics technology, highlighting the growing importance of energy-efficient AI infrastructure. Hence, activities in the second are in full-swing.
Meanwhile, global semiconductor supply chains continue to face a structural bottleneck, with production capacity falling short of AI-led demand. High demand and lesser supplies should keep the space charged-up.
Valuation high But Less than Historic High
The P/E ratio (10-year range) shows that SMH ETF witnessed a valuation of as high as 97.95X and a low of 13.1X, per Guru Focus. So, the current valuation can be viewed as being in the moderate range.
Steady Return of Chip Stocks Over the Long Term
SMH ETF has offered an annualized return of 58.69% over the past three -years – a period marked with heightened AI boom. However, the fund has outperformed both SPY and QQQ over the past decade as well.
SMH generated an annualized return of 36.09% over the past ten years, up from 15.22% offered by SPY and 21.24% delivered by QQQ, per the data provided by GuruFocus. Hence, if held for the long-term, chip ETFs should bode well for your portfolio.
How Harmful Rate Hikes Could be for Chip ETFs?
In 2018, the Federal Reserve implemented four separate rate hikes, raising the federal funds rate by 25 basis points at each of those four occasions. SMH lost 9% in 2018.
In 2022, the Fed raised interest rates to combat surging inflation, ending the year with seven successive rate hikes. SMH ETF lost 33.5% in that year. With almost half of 2026 already passed, we are less likely to see any aggressive rate hikes in the rest of this year. So, we can expect SMH not to slide very harshly over the medium term.
Added to this, if we get a concrete ceasefire deal in the Iran conflict, the inflation may calm down and the Fed may not have to act in a hawkish way. So, if you are not invested in chip ETFs yet, you can consider the latest slump as an entry point.
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Microsoft Corporation (MSFT): Free Stock Analysis Report
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Invesco QQQ (QQQ): ETF Research Reports
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VanEck Semiconductor ETF (SMH): ETF Research Reports
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This article originally published on Zacks Investment Research (zacks.com).