Alphabet, Tesla and Intel report this week as investors test the AI spending case
The benchmark index tracking US chip stocks has slipped into a bear market, ending last week more than 20 percent below its late-June record, Reuters reported, forcing a reassessment of the trade that has driven this year's rally.
Chipmakers recovered some ground on Monday.
The Philadelphia SE Semiconductor Index closed 0.6 percent higher after rising nearly 4 percent earlier in the session, according to Reuters.
Micron Technology climbed almost 2 percent and Teradyne rose 3.5 percent, CNBC reported, while Advanced Micro Devices added 1.6 percent after saying Microsoft would expand its use of AMD products for AI, including the new Helios line in the second half of the year.
The bounce did little to settle the debate.
Darrell Cronk, president of Wells Fargo Investment Institute, told CNBC the semiconductor and AI trade is going through a reality check.
He said recent technical deterioration raises the risk of a deeper pullback toward longer-term support levels, including the 200-day moving averages.
The retreat reflects weeks of concern that AI-linked valuations climbed too far, too fast.
Companies are booking billions in revenue as customers spend heavily on AI chips and data centres, AP reported, but that spending could stall if the technology fails to deliver the profit and productivity its backers have promised.
Investors will start to test that thesis this week.
Alphabet reports on Wednesday, with Tesla and Intel also due, according to Reuters, and markets want proof the spending is paying off before valuations near record highs can hold.
Ian Chong, portfolio manager at First Avenue Investment Counsel, said the focus would fall on the strength of Alphabet's cloud growth, The Canadian Press reported.
Alphabet rose 1.5 percent on Monday following a report that its Google unit is building a Gemini-integrated server chip to improve AI efficiency, as per Reuters.
Some expect the unwinding to run further.
Thomas J. Hayes, chairman of Great Hill Capital, told CNBC the memory and chip trade had grown dangerously consensus.
"Semis and memory is the most crowded global trade by institutional and retail positioning. It's over," he said, predicting investors would exit as aggressively as they piled in.
Nowhere has the reversal cut deeper than South Korea, where retail investors used heavy leverage to chase the same chip names.
Since single-stock leveraged ETFs launched on May 27, Korean retail investors have bought a net 14tn won (US$9.4bn) of them, against roughly 2tn won from foreign investors, KB Financial Group told CNBC.
A product designed to deliver twice the daily move in SK Hynix has since fallen about 70 percent from its June record and roughly 50 percent from its debut, according to LSEG data.
The losses landed mostly on individuals.
"The investors bearing the losses are overwhelmingly domestic retail investors," said Jung In Yun, founder of Fibonacci Asset Management, in comments to CNBC.
Many were not novices, he added, but investors in their 40s and 50s comfortable with leverage and concentrated technology bets.
The individual bets have been extreme.
Reuters reported that Lee Seung-ho, a 24-year-old university student in Seoul, built a fortune of nearly 300m won (US$202,515) using a 500 percent margin loan, then watched it evaporate in four weeks in May.
"I literally could not breathe," he told Reuters, though he said he plans to borrow and trade again.
Regulators have moved to cool the frenzy.
South Korea unveiled tougher rules on Thursday for single-stock leveraged ETFs, requiring investors to post at least 30m won in cash to trade them, up from an effective minimum of 3m won, Reuters reported.
Margin loan balances had hit a record 38.63tn won on June 24 before easing to 34.37tn won by July 15, according to the Korea Financial Investment Association.
"The FSS Governor has already admitted these products were approved too hastily, so this is a correction of a known policy error," Inki Cho, senior financial market strategist at Exness, told Reuters.
The broader session was subdued.
The Nasdaq composite slipped 0.05 percent to 25,508.07, the S&P 500 lost 0.19 percent to 7,443.28 and the Dow Jones Industrial Average fell 0.59 percent to 51,839.26, Reuters reported, with Apple the heaviest drag on the S&P after a 2 percent decline.
In Toronto, the S&P/TSX composite index dropped 0.9 percent to 34,960.32 for a third straight loss, weighed down by a 1.9 percent slide in financials, as domestic inflation cooled to 2.8 percent in June.
