A sharp selloff in semiconductor stocks last week has rattled markets globally, raising questions about whether the AI-fueled rally had become overextended.
Investors across Asia, Europe and the United States pulled back from AI-linked and momentum stocks that have driven market gains for much of the year.
The Philadelphia SE Semiconductor Index fell 1.6% on Friday and tumbled about 10% for the week, marking its sharpest weekly decline in more than a year, per Reuters, as quoted on Yahoo Finance. The index is now down more than 20% from its late-June record high, placing it in bear market territory, though it remains up more than 60% year to date.
Profit-Taking and Valuation Concerns
Market participants attributed much of the weakness to profit-taking following a massive rally. Chuck Carlson, chief executive of Horizon Investment Services, suggested that the decline was driven more by portfolio repositioning than by deteriorating business fundamentals, per the same Reuters source.
Fresh AI Developments Fuel Investor Anxiety
Several developments intensified concerns over AI spending during the month.
Chinese AI startup Moonshot unveiled what it described as the world's largest open-weight AI model, renewing investor scrutiny over whether U.S. technology companies will generate adequate returns on their enormous AI investments.
Separately, a Bloomberg report indicated that Alphabet's Google is running months behind schedule in launching its flagship Gemini 3.5 Pro AI model, adding to worries about the pace of AI innovation.
Global Technology Stocks Come Under Pressure
The semiconductor selloff coincided with weakness across global equity markets.
South Korea's KOSPI briefly entered bear market territory last, while Japan's Nikkei slipped into correction territory. Europe's technology sector also ranked among the week's weakest performers, per the above-mentioned source.
Leveraged Semiconductor ETFs Hit Hard
The pullback has been even more pronounced in leveraged semiconductor ETFs.
The Direxion Daily Semiconductor Bull 3X ETF SOXL has plunged more than 50% from its late-June high. The fund slumped 22.8% last week.
Goldman Sachs indicated that several large hedge funds have recently reduced exposure to leading AI infrastructure companies after building sizable positions earlier in the year, per the above-mentioned Reuters source.
According to Walter Todd, chief investment officer at Greenwood Capital, many investors had become overly confident that AI-related stocks would continue climbing. Those who borrowed money to buy these names may now be facing margin calls as prices decline.
Investors Rotate Rather Than Exit AI: How to Trade AI Now?
Despite the volatility, market participants do not appear to be abandoning AI investments altogether. Options activity also suggested bargain hunting. Several semiconductor names, including SK Hynix, Micron Technology and SanDisk, attracted bullish options trades in recent sessions.
Should You Be Selective in AI Trades?
U.S.-listed shares of SK Hynix briefly traded below their offering price before recovering to finish modestly higher on Friday. So, Direxion Daily SK Hynix Bull 2X ETF (SKHL), Leverage Shares 2x Long SK Hynix Daily ETF (SKHX) and T-REX 2X Long SKHY Daily Target ETF (HYNX) could be options to play (read: Tap SK Hynix's Memory Leadership With These New Leveraged ETFs).
Note that 16 single-stock leverage products tied to Samsung Electronics and SK Hynix, including two inverse products, fetched about 7 trillion won over one month, as quoted on Seoul Economics Daily. So, who says AI trade is dead?
Micron’s MU underperformance last Friday was respectable as the stock slipped only 0.5%. The company has already reported Q2 results, with earnings up 1350.1% on 345.7% higher revenues. So, MU-heavy ETFs like iShares MSCI USA Value Factor ETF VLUE, Strive U.S. Semiconductor ETF SHOC and Global X AI Semiconductor & Quantum ETF CHPX should be in focus.
Earnings Paint the True Story of AI Companies
The Q2 earnings season has started strong. Many S&P 500 companies will report over the coming weeks. Two companies — Micron and NVIDIA — are significant contributors to the Tech sector's robust growth expectations, per the Earnings Trends.
Barring the contribution from Micron and NVIDIA, Q2 earnings for the rest of the Zacks Tech sector would be up 25.3% (vs. 48.8% otherwise). Hence, although NVIDIA is down 3.7% over the past month, one can consider this a buying opportunity. VanEck Fabless Semiconductor ETF SMHX and VanEck Semiconductor ETF SMH are some NVDA-heavy ETFs.
Bottom Line
AI mania is not over yet. What’s happening currently is a valuation correction. Despite the immense demand for memory, the Roundhill Memory ETF DRAM lost 8.3% last week and more than 30% past month. Even with these selloffs, the DRAM ETF is still up about 90% this year.
So, recent corrections can be seen as healthy. Investors can take this as a buying opportunity as long as the AI boom remains in place (read: Memory Stocks & ETF DRAM in Bear Market: Time to Buy the Dip?).
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Micron Technology, Inc. (MU): Free Stock Analysis Report
VanEck Semiconductor ETF (SMH): ETF Research Reports
iShares MSCI USA Value Factor ETF (VLUE): ETF Research Reports
Strive U.S. Semiconductor ETF (SHOC): ETF Research Reports
VanEck Fabless Semiconductor ETF (SMHX): ETF Research Reports
Global X AI Semiconductor & Quantum ETF (CHPX): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).