After the July sell-off: Has the golden age for chipmakers come to an end?

In July, investors unleashed a veritable bloodbath on the tech stock markets. The recent favorites—chipmakers and other AI-related companies—have become outcasts. Now the market faces two questions: Should we expect a rally, and will semiconductor stocks lead it?

Fears of a potential bubble in the AI sector began to spill over into the market as early as late June. Investors began to worry that the best days for chipmakers’ stocks were behind them, Bloomberg notes: they have once again become concerned about the wisdom of tech giants’ trillion-dollar investments in infrastructure and the proliferation of new open-source AI models (which are potentially more efficient and require lower infrastructure costs).

As a result, July was the worst month since October 2008—when the market was falling amid the global financial crisis—for the Philadelphia Semiconductor Index, which tracks the stocks of the 30 largest chipmakers. Over the month, the index lost more than 20% and entered “bear” territory. Even after rising 8.3% combined on Thursday and Friday, July 30 and 31, it remains 23% below its peak on June 22. More than half of the companies in the index have lost at least 25%.

Taiwan’s TSMC posted the worst performance in the index—down 15% with a market capitalization of $380 billion. Its shares, along with those of South Korea’s Samsung Electronics and SK Hynix, were among the main beneficiaries of the AI boom and turned out to be among the main victims of the July sell-off. In South Korea, this boom turned into a full-blown bubble, drawing in crowds of inexperienced investors who were trying to make as much money as possible by using leverage.

From its peak closing level on June 22, the KOSPI index plummeted by more than 34% by July 30.

The entire MSCI Emerging Markets Index has been caught up in the sell-off in the Korean and Taiwanese markets. These markets account for about 45% of the index. In the first half of the year, these markets drove the index higher, but then they dragged the entire index down.

It is true, however, that even after the decline, the MSCI EM has risen 18.6% year-to-date, which is twice the performance of the U.S. S&P 500.

For most of the year, emerging markets were one of the most popular investment choices among investors. But now, the downturn in the AI sector, coupled with the ongoing conflict in the Middle East, is creating a “bleak backdrop” for them, according to Roger Mark, an analyst at Ninety One Asset Management who specializes in these markets.

“There are many unknowns here, and it’s fairly easy to imagine a scenario in which the situation could easily deteriorate even further,” he told Bloomberg. “For emerging markets, the main risk is related to energy: what will happen if energy supplies [from the Persian Gulf] do not resume, and how this will affect inflation and central bank actions.”

The sell-off in global markets has so far been concentrated in the AI sector. The S&P 500 and the Dow Jones are only 1–2% below their all-time highs. However, the Nasdaq 100 index, which tracks the largest technology companies, even entered a technical correction zone at the end of the month, falling 11% on July 29 from its June 2 high.

Among the index leaders, the sell-off hit Nvidia the hardest. In late July, it even lost its title as the world’s largest company to Apple for a few days. Apple lagged behind other tech giants in AI development and, as a result, was able to avoid the negative consequences associated with it.

The story surrounding SpaceX’s initial public offering (IPO) also served as a clear indication of the cooling interest in AI; investors view SpaceX primarily as a company whose future is tied to the development of AI. The IPO priced at $135 per share; at their peak, the shares rose to $225.64, after which they fell by more than half. At Friday’s close, they were trading at $108.37.

The nearly unrelenting slump came to a halt in the final days of July. On July 31, the Kospi index jumped nearly 18%, with SK Hynix shares rising by about a third and Samsung shares by nearly a quarter. Some investors began actively pouring money into the hard-hit sector, snapping up cheap stocks. Foreign investors bought $5 billion worth of Korean stocks on Friday, even as local market participants sold a record $5.8 billion worth, according to Bloomberg.

The Philadelphia Semiconductor Index gained 8.3% over the last two days of July. Despite the bearish trend that has taken hold over the past month, it has risen 57.8% year-to-date, thanks to a doubling in value from March through June.

In the U.S., retail investors rushed to “buy the dip.” According to Bloomberg Intelligence, retail investors generated a record net inflow of $12 billion into exchange-traded funds linked to the semiconductor industry over the past week.

Investments accounted for 25% of total net inflows into all exchange-traded funds, even though semiconductor ETFs make up only 1% of their assets.

Many analysts point out that chip manufacturing has always been a cyclical business: when demand rose, manufacturers profited from rising prices and increased capital investment to boost output; as a result, after a while the market became oversupplied, and their profits fell. Although companies now insist that AI and investments in related infrastructure have radically changed the situation, creating constant demand for memory chips, Charles Lemonides, Chief Investment Officer at Valueworks, is confident that the current cycle will not differ significantly from previous ones.

“I wouldn’t be surprised if we see a fairly strong rebound after such a sell-off, but I don’t think chipmakers are likely to lead the next bull market. Their heyday is over,” he told Bloomberg.

"Volatility reflects the true level of uncertainty and the fact that no one knows how things will turn out," added Stephen Evans, Chief Investment Officer at Pave Finance.

Jon Trisi, publisher of the Fuller Treacy Money investment newsletter, notes: Investors were also nervous ahead of the first-quarter earnings season due to uncertainty over whether investment in data centers and other AI infrastructure would remain at high levels. At that time, the market dipped in late March, and then a rally began when companies—primarily tech giants—confirmed their capital expenditure levels in their earnings reports.

“Ahead of the release of second-quarter earnings reports, the market has become even more cautious. Shares of several of the best-known companies benefiting from investments in AI infrastructure have lost half their value over the past month and a half,” Trisi noted.

But Microsoft, Amazon, and Alphabet's strong results last week—and the scale of their investments, which they confirmed—prompted investors to start buying up stocks that had fallen in price, he said.

"The 'bullish' scenario calls for a rally similar to the one in the second quarter, especially in those stocks that experienced the sharpest declines," Trisi believes. "But for the market's recovery potential to be realized, the recent lows must hold. If the recovery fails, the lows will not hold, and prices will fall even lower.”

At the very least, tech megacorporations have shown investors that they will be able to “recoup” their massive AI expenses, notes The Wall Street Journal: “The answer appears to lie in the cloud computing business.”

At Microsoft, Amazon, and Alphabet, this business continues to grow rapidly amid the AI boom. And their business model is relatively easy for investors to understand, unlike many other ways to potentially profit from AI investments—from selling ads through chatbots to subscriptions to AI models.

In the U.S., Microsoft shares soared 15.5% on Thursday: the company’s quarterly results dispelled concerns that investments in data centers, chips, and other business areas would exceed its ability to generate cash flow, the WSJ notes. In a single day, Microsoft’s market capitalization rose by $450 billion—a record in U.S. market history.

At the same time, Meta’s stock fell nearly 8% that same day following the release of results showing that, due to capital expenditures, its free cash flow in the second half of the year would turn negative for the first time since its initial public offering in 2012.

The earnings reports from Microsoft, Amazon, and Alphabet have, at least for now, allayed concerns about the AI sector, Trevor Slaven, global chief investment officer at Barings, told the WSJ. He expects the market to grow, but notes that this is more of a tactical view than a strategic one—“for one, two, or three months.”

“Volatility will be high whether the market is rising or falling,” he added. In the longer term, according to Slaven, competition in the development of AI “will almost certainly lead to excessive spending.”

This article was AI-translated and verified by a human editor