Philadelphia Semiconductor Index drops 3.5% as chip selloff deepens

The Philadelphia Semiconductor Index opened 3.5% lower Tuesday, extending a July selloff that has erased 17% from the benchmark as AI enthusiasm fades.

An AI-related market correction poses a "major credit risk" given how intertwined capital markets have become with the technology, Fitch Ratings said in a report Monday. "The combination of revenue uncertainty and the extent to which capital markets and economies have become intertwined with AI have created a vulnerability for credit," the ratings agency wrote.

Micron Technology led the decline, falling 6.4%, while Advanced Micro Devices dropped 4.9% and ASML lost 4.3%. Nvidia fell 1.2%, Broadcom declined 1.2%, and TSMC slipped 2.9%. The selloff pushed the broader iShares Semiconductor ETF down 5%, while the Roundhill Memory ETF sank 8%.

The chip rout comes as the Federal Reserve begins a two-day policy meeting, with traders pricing in a 31% chance of a rate hike. Apple briefly surpassed $5 trillion in market capitalization, unseating Nvidia as the world's most valuable company, as capital rotated away from semiconductor names.

The broader market showed a stark divergence. The Dow Jones Industrial Average added nearly 550 points, rising 1%, and the S&P 500 gained 0.2%, while the tech-heavy Nasdaq Composite fell 0.2%. Nine of 11 S&P 500 sectors finished in the green, led by Consumer Staples up 4.1%. The Information Technology sector was the biggest laggard, dropping 2%, with Industrials the only other sector in the red, down 0.7%.

The selloff in chip stocks has been building for weeks. The SOX has fallen 17% in July, on track for its worst monthly performance since June 2022. Memory-chip makers have been hit hardest: Sandisk fell 14%, Western Digital dropped 9.3%, and Seagate Technology declined 8.1% Tuesday, according to market data. SK Hynix slid 7.5%. The previous session alone saw the SOX drop 5%, with AMD losing 8.5% and ASML falling 7.3%.

Bank of America's latest survey of fund managers found close to half of respondents identified AI spending by America's biggest tech giants as the most likely source of a systemic credit event, up from about a third two months ago. Investors have been punishing tech stocks even when they beat earnings estimates, with companies that topped profit and sales forecasts recently outperforming the S&P 500 by only 1.2 percentage points the day after results, below the historical average of 1.4 points.

This week is one of the busiest of earnings season, with 169 S&P 500 companies scheduled to report, including Microsoft, Meta, Apple and Amazon. Their results and capital expenditure plans will provide the next test for whether the AI trade can regain momentum or the selloff deepens further.

In cross-asset markets, the 10-year U.S. Treasury yield eased five basis points to above 4.60%, while the dollar index slipped 0.2% to 101.38. West Texas Intermediate crude fell 4.3% to about $79 a barrel, and gold declined 1.2% to $4,025 an ounce.

This article is for informational purposes only and does not constitute investment advice.