Semiconductor Selloff Deepens As AI Spending Fears Hit Intel

Semiconductor stocks are experiencing a sharp downturn, wiping out over a trillion dollars in market value, as Wall Street questions the sustainability of record AI capital spending. While not a demand issue, concerns include dot-com-era valuations, a hawkish Fed, and doubts about AI infrastructure returns. Hedge funds have also profited from the decline. Despite this, many analysts view the sell-off as a "mid-cycle reset," maintaining substantial 12-month price targets for chipmakers like Nvidia and Micron, citing strong earnings growth and attractive valuations for some. However, challenges like enterprise AI price-cutting and Meta selling excess capacity persist. Upcoming earnings from TSMC and Intel could determine if the sector rebounds by exceeding high expectations.

Semiconductor stocks are sliding sharply this week as Wall Street begins to question whether the record surge in AI capital spending can continue — a reset that has erased more than a trillion dollars in market value and pushed Intel down more than 20 percent. The Philadelphia Semiconductor Index is off 10.8%, the VanEck Semiconductor Index has fallen 13% over ten sessions, and the iShares Semiconductor ETF is down 8% in a single week. Reuters estimates roughly $1.3 trillion in semiconductor market value has been wiped out, with Intel, Micron, AMD and Samsung all under pressure.

The root cause of the decline is not a loss in demand; it is an amalgam of fears — doubt about the return on AI infrastructure spending, dot-com-level valuations and a more hawkish Fed, noted the Globe and Mail. In addition, hedge funds have profited from a bet on the decline in semiconductor stock prices for the last month, reported Reuters.

While semiconductor stocks are selling off in the short term, Wall Street’s 12-month price targets still imply substantial upside (Nvidia up 56% and Micron up 66%). However, Intel bucks this trend — it trades 8% above its price target. Morgan Stanley says the recent drop is a mid-cycle reset rather than a top.

I have long written about how stocks move up or down based on whether they beat expectations on two metrics: the consensus growth and profit numbers for the latest quarter and the Wall Street view on the company’s future growth.

Using that formula, when Samsung reported record second‑quarter operating profit of about $58.4 billion, according to CNBC — an 1,810% surge — Wall Street was disappointed by the failure to exceed expectations, with revenue growth falling short of views. "Expectations are up, and fundamentals are struggling to meet these sky-high demands," FBB Capital’s Mike Bailey told CNBC.

The root cause of the drop is fear that hyperscalers’ 67% jump in AI capital expenditures to $650 billion may be unsustainable.

The evidence for that, as I wrote last month, is a chip shortage that raises prices for hyperscalers even as enterprises seek to limit their monthly budgets for AI chatbot use — pressuring high-priced AI chatbot providers such as OpenAI and Anthropic to cut prices.

If a Kevin Warsh-led Federal Reserve raises interest rates to control inflation, the lack of a sufficiently high return on AI investment — coupled with Meta’s decision to rent out spare AI cloud services capacity, according to a Bloomberg News report — could clip AI capital‑expenditure, according to Intellectia.

The bear case — high valuations — seems weaker than the bullish case as long as companies continue to beat and raise.

A bearish analyst compared valuations now to the June 2000 market, which presaged the bursting of the dot-com bubble. A Bubble Risk Indicator from BofA strategist Michael Hartnett hit 0.91 — well above the Nasdaq 100’s 0.69, noted Yahoo Finance. Hartnett added that concerns about concentration among a small number of stocks and current overbought conditions have not been seen since June 2000, according to Seeking Alpha.

The bullish case rests on high growth expectations and reasonable valuations. Second-quarter 2026 semiconductor industry earnings will grow 131%, according to FactSet. “This is 3rd inning, 1 out in a 9-inning game,” Wedbush analyst Dan Ives wrote, reported Yahoo Finance. Nvidia’s forward P/E of 21.7 is attractive compared to the company’s five-year average of 72, Goldman Sachs noted. Finally, the supply of high-bandwidth memory driving semiconductor growth is sold out through most of 2027, according to CNBC.

As noted above, Wall Street’s targets imply substantial upside for most semiconductors. However, cracks in the bull case’s armor are beginning t0 appear — notably price-cutting pressure on AI chatbot providers from enterprises, Meta’s effort to sell excess AI computing capacity and an insufficiently compelling return on AI investment.

If the bull case is strong enough, hedge funds could use the drop in semiconductor stock prices as a buying opportunity. The rebound could be particularly strong if leading chipmakers — notably TSMC, which reports July 16, and Intel, which will share its latest results on July 23 — blow past analysts’ high expectations.

Investors should evaluate the likely outcomes and place their bets accordingly.