US chip stocks had a weak start to July, raising fears that the sector could remain volatile in the coming weeks. The Philadelphia Semiconductor Index has fallen more than 11% since reaching a record high in June. Even after the recent fall, the chip index is still up 83% this year, showing how strongly AI demand has pushed the sector higher. Investors are now questioning whether the AI spending boom can continue at the same pace.
Steve Sosnick, chief market analyst at Interactive Brokers, said chip companies have seen record earnings growth, but investors are now asking how long such strong growth can last, according to Reuters. Money has started flowing out of semiconductor investment funds. Around $11 billion left US chip funds in the week ended June 24, the biggest weekly outflow this century, according to LSEG Lipper data.
Why investors are worried about AI spending
Just two weeks before that, investors had poured about $12 billion into the same funds, showing how quickly market sentiment has changed. Many analysts still believe major cloud companies will continue spending heavily on AI infrastructure.
BofA Securities expects global cloud and AI infrastructure spending to reach nearly $1.5 trillion by 2027, which would be a 40% to 50% yearly increase. Many Wall Street brokerages have increased their price targets for chip companies because they expect AI demand to keep boosting profits.
Which chip stocks could still go up?
Among S&P 500 chipmakers, Micron is expected to have the biggest upside, with analysts seeing more than 60% potential gain from current levels, according to LSEG data cited by Reuters. Analysts expect Sandisk shares to rise by more than 30% from current levels. Higher memory chip prices caused by tight supply have helped memory chip companies around the world. South Korean memory giant SK Hynix recently made its US trading debut after raising $26.5 billion through a share sale.
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Reuters said SK Hynix shares had jumped more than 10% during their US trading debut before the latest decline. Analysts also expect Nvidia shares to rise by more than 40% from current levels. However, many other large chip companies are already trading close to analysts’ 12-month price targets, meaning much of the expected growth may already be reflected in their share prices.
Alexander Lis, chief investment officer at SD Ventures, said higher price targets mainly reflect the strong momentum in semiconductor stocks and should not be seen as a guarantee of future gains, according to Reuters. More investors are now betting that chip stocks could fall.
Why some investors are turning cautious
ORTEX said short interest in major semiconductor companies has reached its highest level in three years. Peter Hillerberg, co-founder of ORTEX, said investors are becoming more cautious and are using hedging strategies after the sector’s huge rally. ORTEX said short positions have increased the most in Marvell, Qualcomm and Micron over the past three years, according to Reuters.
Chip company earnings are still expected to remain very strong this year. Profits for companies in the S&P 1500 Semiconductors & Equipment Industry Index are expected to more than double, according to LSEG data. Much of that earnings growth is expected to come from Nvidia and Micron. However, earnings growth is expected to slow by 2027, with profits projected to rise about 46.1% instead of doubling.
Reuters said uncertainty over future US interest rates and the conflict in the Middle East could also affect company earnings and investor confidence. Although Nvidia’s stock has rallied sharply, its forward price-to-earnings (P/E) ratio has dropped to about 19, its lowest level in more than 10 years. Micron’s forward P/E ratio also fell to a nine-year low of 5.4 in May.
Chris Maxey, chief market strategist at Wealthspire Advisors, said valuations have become cheaper because company earnings have grown faster than stock prices. However, Intel, AMD and Marvell still trade at valuation levels that are well above their long-term averages, suggesting investor expectations remain very high.
Marija Veitmane, head of equity research at State Street Global Markets, said the semiconductor industry will continue to go through business cycles, although those cycles may become longer, according to Reuters.
Why chip stocks fell again on Monday
On Monday, chip stocks fell again in premarket trading, with SK Hynix leading the losses. Investors booked profits after the sector’s recent rally because many believed chip stocks had become too expensive in the short term. Market sentiment also weakened after reports suggested SK Hynix’s operating profit for the current quarter may miss analysts’ expectations.
SK Hynix shares plunged 15% in South Korea, leading to expectations of a sharp fall in its US-listed shares, according to Yahoo Finance. Samsung Electronics shares also declined in South Korea during Monday’s trading. AI memory-related companies Micron, Sandisk and Western Digital each dropped more than 5% in early Monday trading. Other major chip companies, including Intel, AMD, Broadcom and Arm Holdings, also fell by around 2%.
The latest decline came only days after SK Hynix’s successful US market debut, when its American depositary shares closed about 13% above their $149 IPO price. Yahoo Finance said SK Hynix’s $26.5 billion offering became the largest US IPO ever by a foreign company. Chip stocks have been highly volatile in recent months as investors worry that large cloud companies may have to borrow more money to continue funding expensive AI infrastructure projects.
Investors also fear that any slowdown in AI spending could trigger a wider sell-off across memory chip stocks. Despite the recent fall, semiconductor companies remain one of the biggest drivers of earnings growth in the stock market because AI applications need huge amounts of memory chips and computing power.
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