Storage chip concept stocks lose steam as Philadelphia Semiconductor Index falls into technical bear market; Analyst: Market expectations have significantly outpaced reality

According to Zhitong Finance APP, after a surge driven by the storage chip market, the U.S. semiconductor sector has experienced a significant pullback. The Philadelphia Semiconductor Index plunged as much as 5.7% during Friday's session, narrowing the loss to 1.6% by the close, and has now declined 20% from its all-time high at the end of June, officially entering a technical bear market.

Previously, the index had risen by 105% from its low in March this year to its high at the end of June, nearly doubling in just three months. However, several leading chip stocks have recently continued to decline, with Micron Technology (MU.US), Arm Holdings (ARM.US), and Intel (INTC.US) all down more than 30% from their respective peaks.

James Abate, Chief Investment Strategist at Horizon Investments, stated that although industry fundamentals remain strong, stock prices have clearly risen much faster than improvements in fundamentals, and the semiconductor index had previously displayed a “parabolic surge.” Therefore, this current adjustment is not surprising.

Meanwhile, concerns about the sustainability of the AI investment boom have resurfaced. Investors are beginning to question whether hyperscale cloud service providers such as Microsoft (MSFT.US), Amazon (AMZN.US), and Meta (META.US) can continue to maintain AI infrastructure capital expenditures at the multi-trillion-dollar scale in the future. In addition, the semiconductor sector's valuations remain high, raising market concerns that share price increases may have already priced in future growth expectations.

Muneeb Muzaffar, Senior Portfolio Manager at Bold Wealth Partners, noted that while industry fundamentals remain robust, market expectations have clearly outpaced reality. Current valuations reflect the most optimistic growth scenario; investors are now reassessing how much chipmakers’ profits are truly worth and whether previously lofty growth expectations need to be revised down.

In the coming weeks, the AI industry chain will face a key test window. Alphabet (GOOGL.US) will be the first to report quarterly results after the U.S. market closes on July 22, followed by Microsoft (MSFT.US), Amazon (AMZN.US), and Meta (META.US) in the next week. Their AI capital expenditure plans and investment returns will become key market focuses.

Muzaffar commented that the market needs to see more concrete investment returns from hyperscale cloud providers’ AI outlays. As long as capital expenditures continue to be validated, these companies will remain willing to invest, and chipmakers will keep benefiting. However, the combination of high valuations, market sentiment, and fund flows has made the sector's short-term trend more complex.

As one of the leading segments in this rally, storage chip companies have not been spared either. As the market begins to worry about when supply can catch up with the rapidly growing AI demand, and whether profit growth can remain at elevated levels, Micron Technology (MU.US) has fallen 30% from its high, while Western Digital (WDC.US) and SanDisk (SNDK.US) have both dropped more than 35%.

Korea’s Samsung Electronics reported a 19-fold year-on-year increase in quarterly profits at the beginning of this month. However, after its stock price had already surged about 150% year-to-date, the results still fell short of higher market expectations, leading to a sharp share price pullback.

Leading global foundry TSMC (TSM.US) has also seen profit-taking. Although the company raised its full-year capital expenditure and revenue forecasts this week, the stock still fell for seven consecutive trading days, with a cumulative decline of 8.8%, marking the longest losing streak since July 2022.

Nevertheless, in terms of annual performance, the semiconductor sector has still significantly outperformed the broader market. So far this year, the Philadelphia Semiconductor Index is up about 65%, far outpacing the S&P 500's rise of about 9%. According to analysts' aggregated price targets for the index’s 30 constituents, the market generally expects the index to rise another 34% over the next 12 months.

Abate stated that investors do not need to panic excessively about the current adjustment. “Even though the index has fallen 20% from its peak, this only brings it back to May levels. There’s no need to overreact.”