The semiconductor sector is experiencing unprecedented volatility despite strong earnings performance. According to CNBC TV18, earnings for S&P 500 semiconductors and semi equipment companies are forecast to rise 133% for the second quarter from a year ago, with the group expected to contribute about 44% of overall S&P 500 company earnings gains. However, the PHLX Semiconductor index ended Friday down just over 20% from its late-June all-time closing high, reflecting massive daily swings that have become characteristic of the sector. The index is up 65% for the year compared with a 9% gain in the S&P 500, but has declined 18% for July after swinging at least 3 percentage points up or down on half of the month's 12 trading days.
The AI sector experienced its worst momentum print in 27 years as the Morgan Stanley Tech Momentum Index registered a 17-day rate of change of -35.9%. According to reports from Investing.com India, this represents the biggest momentum sale in history, with token volume shifting to cheaper models. The selloff was primarily driven by quantitative funds reducing exposure after a first half where the momentum factor returned roughly 57% and positioning reached the 100th percentile of the past five years.
Despite the momentum selloff, semiconductor suppliers are significantly expanding AI capacity. TSMC reported record Q2 revenue of $40.2B and raised 2026 capex to $60-64B, at least $4B above prior guidance, plus an additional $100B investment in Arizona. As reported by Investing.com India, the company's full-year revenue growth guidance moved up to 40%+ from 30%+. SK Hynix completed the biggest international NASDAQ listing ever, raising $26.5B in a record first-time U.S. share sale by a non-U.S. company, with shares opening 14% above pricing.
Recent earnings reports suggest sentiment has begun to shift despite strong fundamentals. According to CNBC TV18, on Thursday, US-listed shares of Taiwan Semiconductor Manufacturing slipped even though the company posted a 77% jump in second-quarter net profit and beat market forecasts. Earlier this month, shares of Samsung Electronics fell sharply even though the company reported a 19-fold jump in second-quarter operating profit. Market watchers attribute much of the volatility to option activity by retail investors and the rise of leveraged exchange-traded funds that amplify market movements. South Korea's financial regulator has unveiled regulatory measures to ease market volatility triggered by single-stock leveraged ETFs linked to chipmakers Samsung Electronics and SK Hynix.
The semiconductor boom extends beyond traditional data center exposure, with demand broadening across multiple sectors. As reported by CNBC TV18, Daniel Morgan, portfolio manager at Synovus Trust, notes that "you're seeing a broadening out" with demand from industrial electronics, wireless communications and cars. However, Jake Dollarhide, chief executive officer of Longbow Asset Management, warns that "this chip demand for AI is not a forever scenario," adding that "during the earnings season, anybody who disappoints is going to get clobbered." The analysis expects hardware demand to triple over the next two years, with memory, CPUs, and networking growing even faster as the agentic AI era broadens memory demand beyond HBM.
Despite broader sector challenges, individual tech companies are showing resilience. Adobe reported 13% year-over-year revenue growth in Q2 fiscal 2026 and its AI-first annual recurring revenue tripled year-over-year, exceeding $500 million. Broadcom demonstrated strong fundamentals with 48% year-over-year revenue growth in Q2 and AI-related revenue surging 143% year-over-year, accounting for almost half of total revenue. The recent market correction has created attractive entry points, with Adobe trading at a forward P/E ratio of 9 compared to high teens and low 20s previously, while Broadcom has seen a 21% drop from all-time highs despite strong AI semiconductor growth prospects.
