Has the AI Bubble Finally Burst? Most global market investors may be concerned about this, given the recent drop in prices of semiconductor stocks. From Korea to Japan to the US stock market, leading equity indexes are seeing new bouts of selling in AI chip stocks.
The numbers tell a sobering story: Paul Hoffman, BestBrokers.com, shares the numbers. “As of July 2026, AI-linked companies account for 62.04% of the S&P 500’s total market capitalisation,” says Hoffman. This means this selloff has the power to shake the entire market, not just chipmakers.
During Thursday’s regular session, the Nasdaq Composite dropped 1.4%, and tech-heavy Nasdaq-100 fell over 1.6%. Micron Technology, Broadcom, AMD, Western Digital, Seagate, Rocket Lab, Scandisk, and Intel were the top losers, falling between 5% and 13% during the session.
On Friday, the story continues with US stock futures pointing towards a significantly lower opening for the Nasdaq, where futures are down over 1.5%. This suggests the pressure on chip stocks is far from over.
“The decline was led by the semiconductor sector, where investors reduced exposure following the strong gains accumulated over recent months, particularly among companies tied to artificial intelligence,” says Antonio Di Giacomo, Senior Market Analyst at XS.com.
Semiconductor Stocks in Focus
The focus of market interest has once again shifted to the semiconductor industry. The lofty valuations of AI-related chipmakers have come under scanner and investors seem to have started taking note despite the industry’s aggressive growth expectations.
Chipmakers have been among the top achievers over the last two years, serving as the foundation for consumer technology, cloud computing, data centers, automotive electronics, and artificial intelligence. But following an incredible surge driven by confidence about AI, investors are starting to wonder if values have gone too high.
Dan Niles, Niles Investment Management founder, has been positive on chip stocks more than on the AI investments of Hyperscalers. In an interview with CNBC a month back, Niles said, “I think that just gets back to where the money is being spent, not the guys who are spending the money because they’ve got cash flow concerns or having to raise capital to fund that spending.”
Stocks Under Pressure
The recently listed SK Hynix ADR is down nearly 10% since the debut and closed over 13% lower on Thursday. This is a sharp fall for a stock that had generated significant excitement at listing.
Another case is Taiwan Semiconductor Manufacturing Company, where the stock is under pressure despite posting strong Q2 results and giving upbeat Q3 guidance. This shows that even solid earnings are not enough to protect chip stocks right now.
Most Semiconductor Sector stocks have doubled several times over in the last 1 year, with the benchmark PHLX Semiconductor Sector Index (SOX) clocking over 100% during the same period.
Over the past month, SOX has fallen by nearly 17%, closing 4.29% lower on Thursday, while the KOSPI Composite has dropped over 24% during the same period. Japan’s Nikkei 225 and the broader TOPIX index also continue to feel the pressure.
Profit Booking, Or Something Bigger?
The writing is on the wall. The chip stocks are under pressure. The fatigue in the tech stocks may be getting more visible, and some investors could be booking profits.
“Companies within the artificial intelligence ecosystem. In recent quarters, enthusiasm for AI has fueled strong rallies in chipmakers, infrastructure providers, and software companies, prompting many investors to lock in profits ahead of the new corporate earnings season,” adds Giacomo.
The recent market correction could also indicate a shift or rotation of funds into defensive sectors. Such events typically occur after a peak in AI-related stock performance and reflect cautious reassessment of high technology valuations amid rising macroeconomic uncertainty and restrictive central bank policies.
According to Hoffman, “As of July 2026, 218 companies of the 503 index constituents are now directly linked to the AI economy, representing 43.3% of all. Together, these companies are worth $42.39 trillion, accounting for 62.04% of the S&P 500’s total market capitalisation. Just 58 Core AI companies – those building AI chips, models, software, and security – are collectively valued at $32.2 trillion, having a combined index weight of 47.13%.” This scale explains why any wobble in chip stocks can move the broader market so sharply.
Going Forward
The escalating tensions between the US and Iran have once again intensified concerns over supply disruptions in the Middle East. Oil is up over $85, gaining more than 10% for the week.
A rising inflation scenario may prevent the US Federal Reserve from cutting interest rates, resulting in increased borrowing costs for businesses and other borrowers. Together, these factors add another layer of uncertainty for markets already on edge over AI valuations.
Investors will keep a close watch on the upcoming earnings season for semiconductor and large-cap technology firms. That could turn the tables if clarity emerges on AI demand and enterprise spending.
“Investor attention is now turning to the upcoming earnings reports from the largest technology companies. Alphabet, Microsoft, Meta, Apple, Amazon, Nvidia, and Tesla will need to demonstrate that their substantial investments in artificial intelligence continue translating into revenue growth, margin expansion, and stronger cash flow generation. Their results could determine the Nasdaq’s direction over the coming weeks,” says Giacomo.
Macroeconomic factors such as US inflation data and the Federal Reserve’s communications will be essential for interest-rate expectations. Additionally, developments in geopolitical tensions in the Middle East could directly affect energy prices and overall market sentiment.
So, is it early to say the AI bubble has burst? At least this is what Yardeni Research suggests on it X post dated July 8, 2026: We view the recent weakness in semiconductor stocks as a buying opportunity. Their melt-up over the past three years has been well supported by their earnings. The S&P 500 Semiconductor industry’s forward P/E was 17.4 yesterday.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investment in foreign securities involves significant risks, including currency fluctuations, different financial reporting standards, and varying regulatory environments. Views expressed by market analysts and industry experts quoted in this article are their own and do not reflect the views of Financial Express Digital. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor. Financial Express Digital does not take responsibility for any losses arising from decisions based on this content.
