Global Market: AI-driven chip rally stumbles as investors question lofty valuations after sharp selloff

The global artificial intelligence-fuelled rally in semiconductor stocks suffered a sharp setback last week, prompting investors from Asia to the United States to reassess whether expectations surrounding AI spending have become overly optimistic.

The selloff, which hit many of the market's biggest winners this year, triggered broad profit booking across AI-linked and momentum stocks that had driven equity market gains for much of 2026. According to Reuters, the sudden reversal has raised concerns over stretched valuations, heavy investor positioning and the sustainability of massive AI-related capital expenditure.

The Philadelphia Semiconductor Index fell 1.6% on Friday, extending its weekly decline to around 10%, its steepest weekly drop in more than a year. The index has now fallen more than 20% from its record high reached in late June, officially entering bear market territory. Despite the correction, it remains more than 60% higher for the year.


Market participants said the decline reflected a combination of profit-taking and growing investor caution after semiconductor shares surged rapidly over recent months. Investors are increasingly scrutinising whether the pace of AI infrastructure spending can justify elevated valuations across the sector, as per a Reuters report.

Analysts also pointed to several catalysts behind the recent weakness. Chinese AI startup Moonshot unveiled what it described as the world's largest open-weight AI model, intensifying questions about competitive dynamics and future returns on AI investments by major U.S. technology companies. Separately, a Bloomberg report indicated that Alphabet's Google faces delays in launching its flagship Gemini 3.5 Pro AI model, adding to investor concerns.

The weakness was not confined to U.S. markets. South Korea's KOSPI entered bear market territory last week despite remaining sharply higher for the year, while Japan's Nikkei slipped into correction territory. European technology stocks also came under pressure after posting their strongest quarterly performance since 2001 in June.

Momentum investing also showed signs of fatigue. After outperforming the broader S&P 500 by a wide margin this year, the S&P 500 Momentum Index has retreated about 11% in July, significantly underperforming the benchmark index.

Leveraged semiconductor products witnessed even steeper declines. The Direxion Daily Semiconductor Bull 3X ETF has fallen more than 50% from its late-June peak, although it continues to post gains of over 200% for the year.

The selloff has also revived concerns about leverage in financial markets. Goldman Sachs noted rising leverage across multiple segments, including higher retail margin borrowing, increased assets under management in leveraged exchange-traded funds and elevated activity in short-dated options.

Executives at banks serving hedge funds also indicated that several large funds have recently reduced exposure to leading AI infrastructure companies after aggressively increasing positions earlier in the year.

Even so, derivatives markets suggest investors are rotating portfolios rather than abandoning equities altogether. Options activity indicated continued interest in buying semiconductor stocks following the correction, with names such as SK Hynix, Micron Technology and SanDisk attracting bullish options positioning during Friday's trading session.

Among individual stocks, Nvidia fell 2.2% on Friday, Intel declined 2%, Applied Materials lost 5.6%, Micron slipped 0.5% and SanDisk dropped 4%.

SpaceX shares also fell 5.4% after the company's Starship test flight was aborted at the last moment, adding to pressure after the stock recently slipped below its initial public offering price. Meanwhile, U.S.-listed shares of SK Hynix recovered from early losses to close modestly higher after briefly trading below their offering price.

Investor attention now turns to the upcoming earnings season, with quarterly results from Alphabet, Tesla and Intel expected soon. Reuters reported that these earnings will be closely watched for fresh indications on AI spending plans, demand for semiconductor products and whether the recent correction marks a temporary pause or a broader reassessment of the AI investment theme.