The Year’s Hottest Rally Is Losing Steam. Investors Are Asking What Comes Next
The year s hottest rally is losing – Wall Street’s sharp rise in AI-focused stocks is beginning to cool, as market participants shift focus from the sector’s rapid gains to broader risks. Recent weeks have seen semiconductor companies face selling pressure, driven by concerns over Middle East tensions, profit-taking after a record-breaking run, and a reassessment of long-term value. This has contributed to declines in major US indices, with the S&P 500 and Nasdaq Composite falling nearly 2% and 5% respectively since their peaks on June 2.
Semiconductor stocks played a central role in the market’s AI-driven surge. According to Mike O’Rourke, chief market strategist at JonesTrading, the industry captured almost half of the S&P 500’s annual gains. However, the pace and magnitude of this growth have sparked questions about its ability to sustain. “The semiconductor rally was way over its skis,” said Jeff Buchbinder, chief equity strategist at LPL Financial. “Investors were as loaded up with tech stocks, particularly semiconductors, as they ever get.”
Chipmakers’ influence extended beyond their own sector, helping global markets recover from earlier declines tied to the US-Israeli conflict with Iran. Yet, after posting their strongest quarterly performance on record, the industry now faces uncertainty. Some investors are cashing in profits, while others are scrutinizing Big Tech’s long-term AI infrastructure spending and its potential impact on chip demand.
Micron Technology, a key player in the semiconductor space, has dropped over 20% since its record high on June 25. Similarly, the PHLX semiconductor index has lost 15% since late June. These declines reflect a cooling in enthusiasm for the AI boom, even as the sector remains a critical driver of innovation. Demand for chips, coupled with limited supply, enabled companies to increase prices and secure long-term contracts, boosting profitability and future revenue prospects.
“Shares have been priced for super-strong earnings growth into the future, and the worry is that AI infrastructure spend can’t keep driving memory prices higher forever,” Neil Wilson, strategist at Saxo Markets, noted in a recent analysis.
As Wall Street prepares for another earnings season, expectations are rising. The focus has turned to “hyperscalers”—Big Tech firms like Microsoft, Meta, and Google—spending billions to expand data centers and AI systems. “The market is looking beyond the buildout phase now and increasing the scrutiny on hyperscalers and others who are investing heavily in AI to make sure that the payoff is going to come,” Buchbinder added.
Investors are cautious, wary of overvaluation. Alonso Munoz, chief investment officer at Hamilton Capital Partners, highlighted the extreme volatility seen in chip stocks. “You’ve seen almost staggering, unbelievable volatility in some of these chip stocks and memory stocks,” he said. “It makes us even more hesitant to dive in. I think we’d want to see what earnings look like in the next couple of weeks, and going into the back half of this year.”
Meanwhile, a shift toward other sectors has supported overall market resilience. Financials and industrials have gained traction, pushing the Dow Jones Industrial Average above 53,000 for the first time this year. But this rotation remains dependent on the Middle East conflict remaining stable. Recent volatility in the Dow followed strikes between Washington and Tehran, with traders monitoring developments in the Strait of Hormuz for potential effects on oil prices and Treasury yields.
Despite the pullback, the S&P 500 has not yet lost more than 10% from its recent high since March and April 2025. Yet, the market is now closely watching for any cracks in the AI rally that could lead to larger corrections. The coming weeks will be pivotal in determining whether the sector’s momentum can be maintained or if a broader sell-off is in store.
