The rout in semiconductor stocks is rattling nerves on Wall Street, but it’s premature to label this as something more than a correction after a white-hot rally that arguably lifted chip stocks too high too fast.
The decline in semis is taking a toll on tech sentiment generally, but there are some notable pockets of strength, including the recent rally in formerly battered software shares. Reviewing the tech sector’s performance since the start of the Iran war, however, suggests that the still-hefty performance gap favoring these stocks leaves them vulnerable to a bit of mean reversion until risk sentiment stabilizes.
For some perspective, here’s how sector results compare since the bombs started dropping on Iran on Feb. 28, which one might argue marks the beginning of a new era of geopolitical and macro risks. Using a set of ETFs through yesterday’s close (July 28) shows that for all of the recent woes hanging over tech, the sector’s still posting a wide return premium over the rest of the field and the stock market overall.
The SPDR Tech Sector ETF (), despite its recent slide, is still up nearly 24% since Feb. 28. The next-best sector performer: financials (), which is ahead by a distant 13.0%. The broad market’s gain is even softer at 8.6%, based on the SPDR S&P 500 ETF ().
Note, too, that five sectors are underwater in the period profiled in the chart above. The biggest setback is a 6.6% loss for communication services ().
The source of the angst in tech at the moment is linked to a number of concerns that have animated sentiment lately. A key issue is rising doubts over Big Tech’s AI spending and free cash flow. Recent second-quarter earnings reports, such as ’s, highlighted significant cash consumption directed toward AI infrastructure and data center buildouts, for example.
Concerns have also mounted over the financial structure of the broader AI ecosystem, specifically instances where hardware suppliers, cloud providers, and startups fund one another’s compute purchases. An additional worry that’s received attention lately: aggressive multi-billion-dollar manufacturing expansion plans announced by major memory and chip manufacturers (such as and ), which have sparked fears of potential future supply gluts.
Lofty valuations for several high flyers in the tech space haven’t helped. Semiconductor and AI-linked stocks experienced strong gains in the first half of the year. With valuations stretched to near-perfect execution expectations, even modest shifts in sentiment or guidance have triggered profit-taking and leverage unwinding.
Investor anxiety has also been heightened by news of advances in China’s domestic technology supply chain. Reports of Chinese progress in domestic chip-making equipment, alongside competitive, lower-cost large language models from Chinese AI startups, have raised questions about Silicon Valley’s long-term dominance and pricing power. [added comma after “equipment” for proper clause separation]
And then there’s the macro backdrop: Rising , paired with ongoing inflation concerns fueled by energy price volatility, have raised expectations that central banks may maintain higher interest rates for longer, increasing borrowing costs and reducing the relative appeal of equities.
For all the anxiety about tech, it’s important to note that the sector is quite varied, as the chart below reminds. As semi stocks have cratered lately, other industries in the tech space have rallied in recent days.
Tech writ large may be wobbling, but a closer look at the underlying industries suggests that a rotation within the sector — and across sectors — is taking shape. The market, in short, is doing its job and resetting expectations for industries that recently succumbed to a bout of irrational exuberance.