Chip stocks volatile as Wall Street questions AI demand sustainability

Chipmakers have become central to Wall Street's earnings growth story, with the semiconductor and semiconductor equipment sector within the S&P 500 expected to drive approximately 44% of overall index earnings growth in the second quarter. Earnings for these companies are forecast to rise 133% year over year in Q2, far outpacing the overall S&P 500 earnings growth forecast of 26%. The PHLX Semiconductor Index, which tracks 30 major chipmakers, has captured this enthusiasm with a 65% surge this year, substantially outperforming the S&P 500's 9% gain. Major contributors include Micron Technology, Advanced Micro Devices, and Broadcom, all riding the wave of massive spending on artificial intelligence infrastructure.

Yet the sector has become a study in extreme volatility. The semiconductor index fell 18% in July alone, with trading days moving at least 3% higher or lower on half the month's days. From its record closing high in late June, the index has since fallen more than 20%. Rick Meckler, partner at Cherry Lane Investments, noted the shock of such daily swings for companies of this size, adding that "a disappointing outlook could" change the earnings picture investors have priced in.

A troubling pattern has emerged: strong results no longer automatically reward shareholders. Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chipmaker, reported a 77% increase in second-quarter net profit and exceeded analyst expectations, yet shares fell. Similarly, Samsung Electronics reported a 19-fold increase in second-quarter operating profit and saw shares decline sharply. These reactions suggest investors are questioning whether the surge in AI-related chip demand can continue at its current pace and whether valuations can be sustained. Jake Dollarhide, CEO of Longbow Asset Management, captured the sentiment bluntly: "This chip demand for AI is not a forever scenario. Anybody who disappoints is going to get clobbered."

Market observers identify multiple sources of volatility. Leveraged exchange-traded funds tied to major chipmakers amplify price movements by creating additional buying pressure when stocks rise and accelerating selling when prices decline. Retail investor options activity has also become a significant driver; Meckler stated, "One thing that's driven a lot of these stocks has been option activity by retail investors. That's a big factor in just how volatile the stock moves have become." South Korea's financial regulator recently announced measures aimed at reducing volatility linked to single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix. Investment firm BTIG has raised historical concerns, noting that semiconductor stocks' volatility patterns resemble those seen before the 2000 dot-com bubble peak.

Intel and Texas Instruments are scheduled to report earnings this week, while Nvidia, the world's most valuable chip company and the primary beneficiary of the AI boom, is not due to report until late August. Beyond the near-term earnings calendar, some investors see sources of growth beyond AI data centers. Daniel Morgan, portfolio manager at Synovus Trust, pointed to demand from industrial electronics, wireless communications, and automotive applications. However, he noted lingering weakness: "The only place where I still see continued weakness is in the chips that go into handsets," citing companies such as Qualcomm. Historically, chipmakers have been viewed as cyclical companies whose fortunes rise and fall with broader economic activity; the AI boom has strengthened demand but has also increased the sector's dependence on expectations surrounding a single technology trend.

The semiconductor sector has emerged as the engine of S&P 500 growth, with the industry expected to account for approximately 44% of earnings growth in the second quarter despite making up a smaller share of the index. The PHLX Semiconductor Index's 65% year-to-date gain reflects the outsized performance of companies like Micron Technology, Advanced Micro Devices, and Broadcom, all beneficiaries of massive spending on artificial intelligence infrastructure. However, the index's volatility—with daily moves of at least 3% on half of July's trading days—signals investor anxiety about whether current valuations can be justified.

A key shift has emerged in investor behavior: strong earnings alone no longer guarantee stock price gains. Taiwan Semiconductor Manufacturing Company shares fell despite reporting a 77% increase in second-quarter net profit and exceeding analyst expectations, and Samsung Electronics declined despite a 19-fold increase in operating profit. This pattern suggests the market is repricing the sector based on forward expectations rather than backward-looking results. Market participants point to two structural factors driving volatility: the growing role of leveraged exchange-traded funds, which amplify both upside and downside moves, and retail investor options activity that creates additional buying pressure in rallies and accelerates selling in declines. The comparison to pre-2000 dot-com patterns underscores investor concern that a single-technology narrative—AI chip demand—has become too concentrated a driver of valuations.

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