A single season surge of 81%, but dropping nearly 8% in the last week! On the eve of the best quarter in the history of the US chip sector, Wall Street begins to question: How long can AI spending support this?

Chip stocks are heading towards their best quarter performance in history, continuing the amazing rise driven by the strong demand for artificial intelligence (AI) devices this year. However, recent market tension has caused a sharp decline in stock prices, leading investors to question how long this rally can last. "The main theme of the market in the past six months has been a comprehensive bet on AI infrastructure, but now people are starting to ask: can this momentum continue? Should we be worried?" said CJ Muse, Senior Managing Director and Technology Industry Analyst at Cantor Fitzgerald. The Philadelphia Semiconductor Index has surged 81% so far this quarter, on track to achieve its best quarterly performance in history with just one trading day left. The index has risen 94% since 2026, and if it maintains this level, it will achieve the largest annual increase since the 1999 Internet bubble. In comparison, the tech-heavy Nasdaq 100 Index rose 25% in the second quarter, while the S&P 500 Index increased by 14%. However, as the rally reaches its peak, last week's sell-off has sounded a wake-up call for the market. With increasing doubts on the sustainability of chip demand on Wall Street, the semiconductor index plummeted by 7.9% in a single week, marking the largest weekly decline since April 2025. Market volatility further intensified on Monday, with the index falling by 3.2% intraday but ultimately closing up by 3.8%. "The biggest concern in the market is whether the hyperscale data center operators will maintain and expand their investments after 2026," Muse said, but he expects this spending spree to not end in the short term. The fluctuation of chip stocks is not new, as the sector has highly cyclical characteristics with prosperity and downturn alternating. This current uptrend is driven by AI demand, which remains strong. As of now, major spenders like Microsoft Corporation, Amazon.com, Alphabet Inc., and Meta Platforms are all continuing their aggressive expansion plans. However, on the flip side, hardware manufacturers like Apple Inc. are facing pressure on their stock prices due to high storage chip costs, with analysts worrying that demand may weaken as a result. Additionally, there are reports that OpenAI is considering delaying its IPO, which is undoubtedly a warning sign for major buyers of AI chips. The following charts summarize the strong performance of the chip sector in the first half of 2026, and highlight the core trends and focus points for the second half of the year: Winners and Losers: NVIDIA Corporation Falling Behind Demand for storage-related products was the main driver of the semiconductor sector in the first half of the year. Storage companies dominated the list of top gainers on the S&P 500. The largest US storage chip maker, Micron Technology, Inc., saw a 301% increase in its stock price this year, ranking second on the S&P 500 list of top gainers with a market value exceeding $1 trillion. The leader in gains was SanDisk, with a 764% surge. Western Digital Corporation, Seagate Technology Holdings PLC, and Intel Corporation all made it to the top five, with Intel Corporation jumping by 257%, as Wall Street grows more confident in its transformation strategy. Meanwhile, South Korean storage chip giant SK Hynix is seeking to list in the US, planning to raise $29.4 billion. "We see investors following the bottlenecks in the semiconductor supply chain - currently favorable to storage chips and helping Intel Corporation as the foundry to revive," said Sean Sun, portfolio manager at Thornburg Investment Management who holds multiple chip stocks. However, some well-known companies have failed to keep up with the trend. As a representative company of AI chips and the world's largest market value company, NVIDIA Corporation has only risen by 4.5% this year, performing the worst in the semiconductor index. The second largest chip maker in the US, Broadcom Inc., also saw a modest increase of 7.6%. "NVIDIA Corporation and Broadcom Inc. are facing supply chain bottlenecks, so they are no longer the high beta stocks they used to be," said Sun. "I believe they will continue to perform well, but investors currently want more flexibility on the strongest themes." Valuation: High but Not "Excessive" Yet The current price-to-earnings ratio of the Philadelphia Semiconductor Index is about 26 times (based on expected earnings), much higher than the 10-year average of 19 times, and not far from the recent high of 30 times set in 2024. Overall market valuations are also high, with the forward price-to-earnings ratios of the Nasdaq 100 Index at 23 times and the S&P 500 Index at 20 times. "There may be some areas in the semiconductor sector where assets are priced near perfection with little margin for error, but overall, I would describe the current valuation level as 'high but not excessive'," Sun said. "Considering the growth prospects of the sector and positive expectations, I find this valuation level acceptable." Compiled data shows that analysts are increasingly optimistic about the outlook for chip manufacturers, with earnings expected to grow by 49% in 2027, higher than the 35% expected in April; revenue is expected to grow by 37%, while at the end of April, the market consensus was 29%. Both of these expected growth rates significantly exceed the S&P 500 Index - the former is expected to increase earnings by 17% in 2027, and revenue by 7.4%. Of course, there is a significant disparity in valuations within the sector. For example, ARM Holdings has a forward price-to-earnings ratio of over 140 times, Intel Corporation at 100 times, both severely overvalued by traditional valuation standards. On the other end of the spectrum is NVIDIA Corporation, with a forward price-to-earnings ratio of 18 times, the lowest since 2018 and much lower than the 10-year average of 36 times. Micron's forward price-to-earnings ratio is around 8 times. Some Wall Street professionals see Micron's low valuation as a warning sign, implying that its revenue and profit may have peaked. High Volatility Becomes the New Normal While chip stocks have seen sharp increases in 2026, it hasn't been smooth sailing. The Cboe Semiconductor ETF Volatility Index, which tracks market expectations for future volatility, has risen by 83% this year and is on track to achieve its largest annual increase in history. This index is far above the 10-year average and at its highest level since April 2025 (during the Trump tariff disruptions). Trading has become increasingly volatile. This month, the Philadelphia Semiconductor Index has had only one trading day with a closing change of less than 1%, and has experienced sharp fluctuations with a 7.9% daily increase and over 10% decline. Data from Goldman Sachs Group, Inc. shows that some of the volatility reflects the emotional trading of individual investors, while hedge funds have been reducing their exposure to this sector. "We are seeing some new faces among investor groups, which has exacerbated the range of fluctuations, and it seems that there is a new research report on AI capabilities every week," said Muse of Cantor Fitzgerald. "We will be in this high-volatility market environment for quite some time."