Chip Stocks Tumble 20% in July, Analysts Split on Rebound

The PHLX Semiconductor Index fell more than 20 percent in July, its worst month since the global financial crisis, as a leveraged unwind in AI-linked names erased months of gains and left the sector's recovery path in doubt.

"Some reprieve is in order after the largest and fastest momentum crash in modern history," Jonathan Krinsky, chief market technician at BTIG, said, while cautioning that a bounce could prove a head-fake.

The Nasdaq Composite logged six straight losses, its worst run since April 2024, coming within a whisker of a 10 percent drop from its June 2 record close. The MS Sector-Neutral Momentum Index posted its worst four-day decline on record at 17.4 percent, surpassing the drops after the dot-com bust, in 2022 and after COVID, Krinsky said.

The stakes are high: chipmakers are heavyweight components of the S&P 500 and Nasdaq 100, so a sustained decline could ripple through the broader tech complex even as Microsoft's record single-day gain of nearly $450 billion showed demand for AI infrastructure remains intact.

The selloff was concentrated in the highflying names investors had chased this year, favored for their role supplying the AI build-out. The Philadelphia Semiconductor Index slid 5.3 percent on Wednesday, its worst session since early July, though it remains up 45 percent this year versus a 5 percent gain for the Nasdaq Composite. A rising 30-year Treasury yield, which touched its highest since 2007 at 5.246 percent, helped hammer technology stocks, as higher yields dent the future profitability that chipmakers sell themselves on.

Krinsky said the Goldman Sachs High Beta Momentum Pair, a strategy of buying winners and shorting losers, now sits 23 percent below its 200-day moving average after being 40 percent above that level in mid-June. From a tactical standpoint, he expects tech to rebound but warns history argues for caution. In 2000, after the dot-com peak, the SOX sank 35 percent in a month, then surged 37 percent before falling again.

"We don't know if we see that sort of rally, but a 20 percent rally would bring the SOX back to its 50-day moving average where we think it likely would fail again, as we still think it eventually tests its 200-day moving average," Krinsky said.

Leverage Unwind Spreads Beyond the US

The pain extended well beyond American shores. South Korea's Kospi finished July 22 percent lower, dragged by Samsung Electronics and SK Hynix after record margin loans unwound and retail traders were blown out. Korean leveraged ETF assets plunged to $4.1 billion as of Thursday from more than $11 billion on June 25. A Citadel deal to buy the remaining equities of Situational Awareness, whose assets collapsed from $45 billion at the start of July to about $10 billion, triggered a relief rally, though traders question whether other over-levered funds remain.

Morgan Stanley lifted Korean stocks to overweight, seeing 36 percent upside to a 9,000 target for the Kospi, arguing the market has passed the midpoint of unwinding leveraged ETFs, hedge fund leverage and retail margin. The firm cut Australia to underweight on limited upside.

AI Spending Discipline Splits the Market

Earnings season has rewarded tech names that hold the line on AI capital spending while punishing those raising it. Microsoft added nearly $450 billion in market value in a single day, its largest one-day gain on record, after forecasting stronger-than-expected cloud growth and reaffirming its spending plans. Azure guided to 45 percent growth on a constant-currency basis, above the 40.9 percent estimate, while capital expenditure plans held at $50 billion for fiscal Q1 2027 and $175 billion for the 2026 calendar year.

Meta sank 8 percent after a soft revenue forecast and its lowest free cash flow in years, a sign of ballooning AI expenses, while Alphabet was also penalized for flagging higher capital expenditure. Amazon jumped 15 percent on upbeat cloud revenue. S&P 500 earnings per share are tracking up 29 percent in the second quarter, among the highest on record outside post-crisis recovery years, yet the index has gone nowhere since earnings season began in mid-July.

For investors, the question is whether the momentum unwind has run its course. Krinsky warned that if the expected bounce fails, the market could see a "correlation-one selloff" like August 2024, in which case the Invesco S&P 500 Equal Weight ETF would go lower. Rising 30-year yields "continue to threaten a multiyear breakout," he said, and any upward pressure is a headwind for recent winners. Callum Thomas, head of research at Topdowncharts, flagged that the ratio of leveraged long to short US equity ETF trading has surged to levels last seen during the 2021 stimulus frenzy, adding to a growing list of topping signals. "At this point the burden of proof is with the bulls and caution is warranted," he said.

This article is for informational purposes only and does not constitute investment advice.