US equity markets experienced significant declines on Friday as investors reassessed the strength of this year's AI-fueled rally, triggering a fresh selloff in chip stocks. The Nasdaq 100 dropped 1.5%, leading broader market losses as investors grappled with concerns over AI build-out progress and consumer spending patterns. The S&P 500 fell 1% as of 4 p.m. New York time, while the Dow Jones Industrial Average declined 0.8%. According to The Hindu BusinessLine, the Philadelphia Stock Exchange Semiconductor Index fell 1.6%, marking the worst week since April 2025 for the high-profile group of stocks. The selloff gathered pace amid renewed Persian Gulf jitters that pushed oil prices higher, while reports that a new, inexpensive Chinese AI model rekindled DeepSeek-like concerns about the industry's economics, as noted by Steve Sosnick at Interactive Brokers. Friday's sell-off meant all three indices ended the week with losses, with the Dow Jones falling 0.9%, the S&P 500 shedding 1.6%, and the Nasdaq Composite down nearly 3% on a weekly basis. As per Reuters, the sudden reversal has raised concerns over stretched valuations, heavy investor positioning and the sustainability of massive AI-related capital expenditure.
The semiconductor sector faced unprecedented pressure this week, with the Philadelphia SE Semiconductor Index dropping 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, though this represents a significant reversal from the blistering rally that saw the index soar 105% between its March low and last month's peak. Shares of Marvell Technology Inc., ARM Holdings Plc, and Intel Corp. have all plunged more than 30% over that span, with memory chip darlings Micron Technology Inc. shares slumping 33% from their peak, while Western Digital Corp. and Sandisk Corp. have both fallen more than 40%. Taiwan Semiconductor Manufacturing Co. slid more than 7%, bringing their decline from a record to nearly 9% after raising both spending and revenue projections for the year, despite being the main chipmaker for Nvidia. The VanEck Semiconductor ETF also posted its third weekly drop in the last four, dropping 9% during this stretch. However, leveraged semiconductor products witnessed even steeper declines, with the Direxion Daily Semiconductor Bull 3X ETF falling more than 50% from its late-June peak, though it continues to post gains of over 200% for the year, as reported by The Economic Times.
Technical analysis reveals concerning signals for the semiconductor sector, with semiconductor stocks approaching their lower Bollinger Band, but their RSI only around 41 and continuing to trend lower, suggesting they are not yet oversold. According to Investing.com, implied volatility remains very high for the group, but the skew has shifted from an extremely bullish positioning to a more neutral stance, indicating that the feverish sentiment and momentum chasing seen in May and June have faded. Of the 142 stocks tracked daily—representing the largest companies in the S&P 500—60% have implied volatility near their 52-week highs, compared with only 2% near their 52-week lows, which historically tends to be followed by a pullback in the S&P 500. The group's bullish momentum appears to have become more balanced, which is probably a healthy sign that the feverish sentiment has faded. Still, implied volatility in individual stocks remains very high, with the sector showing signs of technical exhaustion despite the continued decline potential.
The semiconductor selloff was intensified by multiple developments that raised questions about AI investment sustainability. 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. According to The Hindu BusinessLine, a surprise breakthrough from Chinese AI startup Moonshot jolted the sector, which also joined broader equity losses on geopolitical tensions. Insatiable demand for all things related to AI had recently sent chip shares to their best-ever quarter, but volatility has resurfaced amid concerns about increased competition, possible overcapacity and whether big investments in the technology will pay off, as noted by David Morrison at Trade Nation. The pullback reflects profit-taking and rising scrutiny of AI capex sustainability, with valuations in semiconductor stocks having priced near-perfect demand for what has been a cyclical area in the past. As Investing.com reports, Kimi disturbed the faith by suggesting that highly capable models may be built more cheaply than the American hyperscaler blueprint assumes. The question is no longer whether AI demand is growing. It clearly is. The more uncomfortable issue is how much infrastructure will actually be required to serve that demand, how quickly model efficiency improves and who ultimately captures the economic return.
The selloff has created a violent leadership rotation rather than a broad-market collapse, with capital moving away from the most crowded technology names toward healthcare, financials, industrials, transports and selected software companies. US equity funds saw their first weekly outflow in three weeks, with a net $4.8 billion pulled amid a semiconductor selloff and US-Iran tensions, according to Reuters citing LSEG Lipper data. The shift in sentiment came as semiconductor stocks faced heavy selling after a strong rally in the previous quarter, with the Philadelphia Semiconductor Index declining about 8.48% so far this week after surging nearly 87.75% in the prior quarter. Growth funds reversed course, with investors pulling a net $7.18 billion from US growth funds during the week, reversing the previous week's net inflow of $4.23 billion. In contrast, value-oriented funds continued to attract investor interest, recording $3 billion in net inflows for a third consecutive week, suggesting a rotation toward relatively defensive investment strategies. Technology funds continued to receive fresh investments, although inflows slowed to a three-week low of $1.57 billion. Healthcare funds remained in demand, attracting $465 million in net inflows, while investors reduced exposure to consumer-focused sectors, withdrawing around $579 million from consumer discretionary funds and $409 million from communication services funds. Bond funds extended their winning streak to 13 weeks, attracting $9.89 billion during the reporting period, with investors allocating $2.38 billion to short-to-intermediate investment-grade bond funds and $1.47 billion to short-to-intermediate government and Treasury funds. US money market funds experienced significant redemptions, recording $68.03 billion in net outflows, marking the largest weekly withdrawal since April 15, indicating that investors may be reallocating capital into other asset classes despite heightened market volatility.
