The Philadelphia Semiconductor Index plunged nearly 10% this week, officially entering a bear market on Friday, down 20.2% from its all-time closing high on June 22. TSMC’s ADR fell another 2.8% on Friday, marking its sixth consecutive day of decline, and dropping 8.2% this week.
This wave of selling pressure can be attributed to the following four factors:
First, semiconductor stocks surged by about 80% in the second quarter of this year, and after such a significant rise, they are now undergoing profit-taking and seasonal correction. Bank of America points out that the SOX has underperformed the S&P 500 in the third quarter in 10 of the past 16 years.
Second, the market is re-examining whether the valuation of AI stocks is too high, especially as investors are concerned about whether capital expenditures by hyperscale cloud providers will slow down.
Third, rising geopolitical tensions and energy prices have rekindled concerns about interest rate hikes or the maintenance of high interest rates for a longer period.
Fourth, China’s AI model catch-up is accelerating. The launch of Kimi K3 by Dark Side of the Moon, with its lower cost and performance approaching that of leading US models, has raised concerns in the market about the narrowing of the US AI technology advantage, further dampening confidence in chip stocks.
However, many analysts believe this is more like a summer correction than a fundamental reversal. Bank of America’s Vivek Arya points out that this is a “summer consolidation, not a fundamental reversal,” and remains optimistic about semiconductor, networking, and semiconductor equipment stocks. The reasons can be roughly summarized into four parts:
First, the core reason is that the demand for AI computing power still exceeds the supply. UBS predicts that half of the companies in the Philadelphia Semiconductor (SMS) sector will see their profits grow by 92% this year and another 40% in 2027. UBS believes that computing demand still exceeds available supply, and supply chain capacity constraints are unlikely to ease anytime soon. Therefore, the semiconductor sector can continue to support the overall stock market bullish trend.
Second, memory is also a key support. Bank of America points out that memory spending now accounts for 35% to 40% of capital expenditures by hyperscale cloud operators, two to three times the historical level. DRAM spot prices have risen for eight consecutive weeks, and NAND prices are also stronger, indicating that prices remain resilient.
Third, equipment stocks also have long-term potential. AI infrastructure is entering a multi-year cycle, with Bank of America forecasting that the wafer fab equipment market revenue will reach $190 billion in 2027 and rise to $250 billion in 2028. TSMC (2330) has increased its US investment commitment to $265 billion, which may also force Intel and Samsung to increase their US investments; ASML expects DUV and EUV shipments to increase by more than 30% annually in 2027 and 2028, and may raise prices, creating a tailwind for the semiconductor equipment sector.
Fourth, the market selling pressure is not a panic sell-off. Barclays traders say there are currently “no signs of panic,” and it’s more like investors adjusting their positions rather than a complete withdrawal from the semiconductor sector. WST data also shows that global semiconductor sales growth is still accelerating, with a year-on-year increase of 106% in April and further rising to 119% in May.
In summary, the Philadelphia Semiconductor Index (SSE) has entered a short-term bear market, reflecting a correction after a significant rise, concerns about AI valuations, geopolitical pressures, and interest rate pressures. However, as long as the demand for AI computing power, memory prices, and the equipment investment cycle continue, analysts still believe that the fundamental bullish outlook for semiconductors remains intact.
