Chip stocks flirt with bear territory as AI trade cools

Chip stocks are suddenly looking mortal after a spring sprint tied to the AI spending boom.

The PHLX Semiconductor Sector Index, which tracks 30 major U.S.-listed chip names, was down 19% on Thursday from its June 22 record high, according to Dow Jones Market Data cited by MarketWatch. A 20% drop from a peak is commonly viewed as a bear market, and the index was close to the 11,707.78 closing level that would mark that threshold.

The index fell 4.3% Thursday, according to MarketWatch, as the earnings season began to test investors’ appetite for a group that had already run hard this year.

Money moves beyond chips

MarketWatch reported that chip shares rallied in the spring as investors looked beyond the “Magnificent Seven” tech giants paying for the AI data-center buildout. Semiconductor makers and companies tied to that spending wave became popular targets.

Now, other corners of the market are drawing attention. The S&P 500 financials sector posted a second straight record close Thursday after strong bank earnings, according to MarketWatch. The Dow Jones Transportation Average was up more than 30% for the year and near record levels, while the State Street SPDR S&P Retail ETF finished near its highest point since early 2022, according to FactSet data cited by MarketWatch.

David Royal, chief financial and investment officer at Thrivent, told MarketWatch that the wider participation in the market looked “very healthy.” He pointed to recent labor-market and retail-sales data, saying, “You don’t make an auto purchase unless you have some degree of confidence” in the jobs market.

Every SOX stock is off its peak

All 30 members of the semiconductor index were lower than they were at the benchmark’s June high, according to Dow Jones Market Data cited by MarketWatch.

Marvell Technology was the weakest performer in that stretch. FactSet data cited by MarketWatch showed the stock down almost 40% from the SOX peak, though still up 121% in 2026.

Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research, told MarketWatch the pullback may not be alarming by itself. “One of the things we are learning is that memory is short when it comes to dramatic selloffs,” he said. “I don’t think it’s a terrible red flag.”

Dow Jones Market Data cited by MarketWatch showed that the semiconductor index has had six drops of at least 20% over the past decade, along with 31 pullbacks of 10% or more. The S&P 500 had two declines of at least 20% and eight of at least 10% over the same period.

Earnings expectations are sky high

FactSet estimates cited by MarketWatch showed Wall Street expects second-quarter S&P 500 earnings to grow 23.6% from a year earlier. For semiconductors and related equipment companies, the expected growth rate was 131%.

David Russell, global head of market strategy at TradeStation, told MarketWatch that strong tech results may not settle the question for investors. “Tech might have awesome earnings, but in one, two or three quarters, will it still be true?” he said.

Russell said MarketWatch that investors are showing “fatigue in tech stocks and doubts about the longer-term staying power of the chips.” He added, “We’ve priced in years of growth,” and said money is being shifted into other sectors that could benefit from a solid economy.

Taiwan Semiconductor Manufacturing Co. shares fell about 5.6% for the week, despite the company reporting record quarterly profit, according to MarketWatch. American depositary shares of South Korea’s SK Hynix dropped almost 14% Thursday after volatile trading following what MarketWatch described as the biggest U.S. IPO by a foreign company almost a week earlier.

The next test for the AI trade arrives soon: MarketWatch reported that Alphabet and Tesla are scheduled to report earnings on July 22.

This story draws on original reporting from MarketWatch.