Chip Sector Suffers Historic Rout as Wall Street Frets Over Financing Costs
Semiconductor stocks suffered a historic crash with the SOX index plunging 16% from its peak, wiping out USD 2 trillion in market value amid rising financing costs and inflation fears.
The semiconductor sector, until recently the undisputed locomotive of the markets, experienced one of the worst crashes in its history over the past week. What began as a minor technical correction quickly turned into a massive aggregate loss of market value, estimated by Reuters at about USD 2 trillion. The Philadelphia Semiconductor Index (SOX) dropped by over 12% in seven days. At the end of the week, it closed with another daily decline of 3.83%, bringing its total plunge to 16% since its local peak on October 6. This marks the longest losing streak for the index since 2006, according to Bloomberg data.
The crash spared almost no giant in the sector, with all 30 companies making up the SOX index recording losses. Broadcom, Micron, AMD, Intel, Applied Materials, and KLA all shed around 5%, while chip designer ARM plummeted by some 7%.
Just how negative was the sentiment? Coherent, a manufacturer of optical components essential for data transmission in server farms, crashed by roughly 30% since the beginning of October. This occurred, ironically, despite posting phenomenal quarterly reports with a 34% growth in revenues.
A Feast for Shorts
In every crisis, someone wins, and this time the biggest victors were traders swimming against the current. Short sellers—traders who borrow shares and sell them hoping to buy them back at a lower price—reaped massive profits from the collapse. According to S3 Partners, these traders recorded gross paper profits of approximately USD 32 billion in just seven days of betting against chip stocks.
A central focus of the short-selling frenzy was CoreWeave, an AI cloud infrastructure provider, which lost about 25% of its value over the week, tumbling by some 12% on Friday alone. Traders betting against CoreWeave secured astronomical profits exceeding USD 1 billion.
The core driver of the current rout is not necessarily a drop in technological demand, but rather questions surrounding valuation and the cost of capital. While the market previously priced companies based on demand for AI infrastructure, it is now viewing the financing costs of building those infrastructures with deep concern.
This reality sparked a deep fear that the chipmakers' largest customers will struggle to finance their future purchases, especially against the backdrop of hot U.S. inflation data and rising oil prices. Wall Street's fear gauge, the VIX, confirmed the panic by crossing the 22-point threshold.
A series of senior analysts issued warnings in recent days that the rules of the game have shifted. Emmanuel Cau, European equity strategist at Barclays, cautioned that the most profitable phase of the AI rally may be behind us. Barclays backed up its statements with action, cutting recommendations for hardware firms such as Dell, HPE, and NetApp.
Contrasting the Wall Street panic, entities like Bank of America and Oppenheimer present a remarkably optimistic front. Bank of America estimates that giants like Nvidia, Broadcom, and Micron currently trade at an average forward price-to-earnings multiple of just 13, noting that the SOX index is already pricing in a crash that is unlikely to occur.
Oppenheimer emphasizes that data centers and AI infrastructures continue to display strong momentum, driven by massive investments from the four major cloud companies (Google, Amazon, Microsoft, and Meta). Oppenheimer estimates these investments will total over USD 710 billion this year, surging to USD 1.3 trillion by 2027.
Software and Cyber Catch the Wave
The storm did not remain isolated. Investors seeking safer alternatives earlier in the week found no refuge in software either. The software sector ETF (IGV) plunged 4.8% on Friday. Oracle fell 5%, ServiceNow dropped 4%, Salesforce lost 2%, and Twilio crashed 10.6%.
Cybersecurity stocks were also dragged downward, spearheaded by Palo Alto Networks, which plunged 7.6%, and CrowdStrike, which lost over 7%. The shadow of interest rates also weighs on fintech companies, as higher rates imply escalating default risks.
The flight to safety is further evidenced by capital flows. Michael Hartnett, Chief Investment Strategist at Bank of America, points to a clear shift in investor sentiment, noting that while recent declines pushed over half of global stock indices into oversold territory, it is too premature to declare the crisis over.
Pharma as a Safe Haven
This Wall Street dynamic explains where the capital is fleeing. While the AI bubble grapples with financing costs, investors turned their backs on technology to seek safe harbors. The surprise beneficiaries were large-pharma stocks, which soared to historic highs. The healthcare sector ETF (XLV), heavily weighted by giants like Eli Lilly and AbbVie, reached an all-time high of USD 177.19 on Thursday, surging 5.6% over five days.
AbbVie registered a historic milestone of its own, closing at USD 285.42 on Thursday, driven by positive data regarding a subcutaneous version of its flagship drug Skyrizi. Simultaneously, Eli Lilly closed up 3.6% at its third-highest price ever, bolstered by its dominance in the GLP-1 weight-loss drug market. CEO Dave Ricks revealed that the company completed 40 deals worth USD 20 billion this year.
The rush to pharma did not stop there: Gilead shares jumped 7%, Amgen added 6.5%, Merck rose 2.5%, and UnitedHealth surged 9%.
