A stark divergence in semiconductor fortunes is underway, as investors rotate capital from software to hardware, fueling a massive rally in legacy chipmakers while high-flying AI darlings consolidate.
The semiconductor sector saw a dramatic leadership change, with Intel stock gaining 51 percent over eight sessions while Nvidia rose just 14 percent in the same period, highlighting a broader market rotation out of software and into hardware manufacturers. While both chip giants were on an eight-day winning streak, the performance gap underscores a significant shift in investor preference. Nvidia, the market's long-time artificial intelligence favorite, closed at $188.75, still within the $165 to $195 range it has occupied for months.
"To date, our view has been that ServiceNow is better-positioned for this AI era relative to other application software firms … [but] given that our confidence in that view has weakened and we're hearing more anecdotes of non-AI apps software budget pressure, we're moving to a Neutral rating," UBS analyst Karl Keirstead wrote in a note on Thursday.
The rotation was starkly visible in sector-wide fund flows. The VanEck Semiconductor ETF (SMH), a proxy for hardware, closed the week with an 11 percent gain. In contrast, the iShares Expanded Tech-Software Sector ETF (IGV) fell 7 percent over the same period and is down 29 percent year-to-date. This pressure on software is widespread, with former darlings like ServiceNow and Salesforce both hitting oversold territory with Relative Strength Index readings of 26 and 29, respectively. ServiceNow shares plummeted 19 percent this week alone.
The divergence suggests investors are growing wary of high valuations in AI-centric software and are seeking value in hardware companies that form the backbone of the digital economy. This trend could pressure software stocks further while providing a tailwind for chipmakers like Intel, which are seen as having more attractive valuations and direct exposure to the AI infrastructure build-out. The broader market has remained resilient, with the S&P 500 also up for seven straight days, buoyed by a more benign interest rate environment as the 10-year Treasury yield eased to 4.32 percent.
Hardware's Revenge
The shift in sentiment has been a boon for hardware manufacturers beyond just Intel. Broadcom saw its stock jump 19 percent this week, pushing its RSI to an overbought 71. The rally in hardware is fueled by the massive capital expenditures required for the AI build-out. Companies like Marvell Technology and AMD have soared 46 percent and 25 percent, respectively, since the market bottom on March 30. This extends to companies providing the essential infrastructure, such as Corning, which supplies fiber optics, and GE Vernova and Eaton, which are integral to the power infrastructure needed for data centers.
Intel's resurgence is particularly notable. The stock, which was left for dead by many investors, has been revitalized under the leadership of new CEO Lip-Bu Tan. The company has secured a critical role in the AI supply chain, with Google committing to using multiple generations of its Xeon processors in its AI data centers. Furthermore, Intel is designing and fabricating custom chips for Elon Musk's new Terafab project in Texas. This renewed strength is a far cry from its recent past, where it was forced to sell a 49% stake in an Irish chipmaking facility to Apollo in 2024 to raise cash.
Software's Struggle
The pain in the software sector is palpable. The narrative that AI will allow companies to cut back on SaaS subscriptions and develop in-house solutions has taken hold, eviscerating stocks that were once market leaders. Salesforce, despite a history of strong growth and a recent $25 billion accelerated share repurchase, touched a fresh 52-week low on Friday. The company, a pioneer in the SaaS model, now trades at just 12 times forward earnings, a valuation that suggests deep skepticism about its future growth prospects.
The selling is indiscriminate, hitting even companies that are seen as beneficiaries of AI. Cybersecurity firms like CrowdStrike and Palo Alto Networks, both major holdings in the IGV ETF, have been sold off alongside the rest of the software sector. Palantir, a data-analytics company with deep roots in AI, has also been caught in the downdraft due to its significant weighting in the IGV, which is being used as a hedge against AI-related disruptions. The pressure is so intense that even Microsoft, a titan of the industry, is facing questions about its AI strategy and the competitiveness of its Copilot product.
This article is for informational purposes only and does not constitute investment advice.
