NEW YORK – The explosive surge in semiconductor stock prices has powered the U.S. market’s impressive climb, but the dramatic increases are raising red flags about market overheating and causing some investors to brace for a potential downturn.
The current wave of artificial intelligence market excitement is lifting semiconductor stocks across the board, following Nvidia’s leadership role in the AI investment trend throughout the bull market that started in late 2022. This enthusiasm has swept through the entire chip industry this year, as enormous spending on data centers and AI infrastructure has driven up demand for semiconductors. However, the growing weight of these stocks in major indexes means any stumble could impact the broader market.
“It’s sort of a perfect mix – there is enough of a fundamental story, and then the technical story is also quite strong,” said Steve Edwards, senior investment strategist at Morgan Stanley Wealth Management. “Those two things are coming together into a confluence that has created a very enthusiastic and optimistic investor base, and that is driving that momentum.”
The Philadelphia SE Semiconductor index has jumped 64% since late March, dramatically outpacing the S&P 500’s nearly 17% increase during the same period. Micron Technology and Advanced Micro Devices shares more than doubled in that timeframe, while Intel stock nearly tripled.
Yet even bullish investors in the sector are preparing for the hot streak to fade. The semiconductor surge has prompted some observers to draw parallels to the 1999-2000 internet boom and bust.
“Anytime you see parabolic moves in anything, you have to ask yourself, are things getting too ebullient here?” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. The firm on Monday sold a position in Qualcomm shares from income-generating portfolios, but other portfolios still hold stocks including AMD and Nvidia, Tuz said.
Tuesday brought a pullback, with the SOX index closing down 3%. Some investors were turning pessimistic on the sector. Notable investor Michael Burry revealed Tuesday he was maintaining puts, which provide the option to sell an asset, in the iShares Semiconductor ETF.
The semiconductor sector’s outperformance has made the overall market increasingly dependent on these high-flying companies. The 19 semiconductor and chip equipment companies in the S&P 500 represented 18% of the index’s total weight as of Monday.
The AI infrastructure expansion has also boosted technology firms focused on memory and storage, including Sandisk and Western Digital. Semiconductor and memory stock gains represented 70% of the $5.1 trillion in market value added by the S&P 500 in 2026 through Monday, according to Michael O’Rourke, chief market strategist at JonesTrading.
Market analysts are pointing to concerning signs beneath the surface. Despite the S&P 500 reaching record highs entering this week, just over half of the index’s stocks were trading above their 50-day moving averages, data from Bespoke Investment Group shows.
The semiconductor group has “such a large weight in the S&P 500 now that any correction or any disappointment creates risk for the broader market,” O’Rourke said.
Semiconductors serve as essential parts in numerous electronic devices, and Wall Street has traditionally viewed the industry’s stock movement as a gauge of economic health and market direction. Recently, these companies have become central to the AI revolution.
“It’s really the AI infrastructure buildout. It’s the computing needs, it’s the networking needs,” said King Lip, chief strategist at BakerAvenue Wealth Management in San Francisco, which has overweighted semi stocks in its portfolios. “It’s really a multi-year capex cycle — very exciting in our view as it relates to semiconductors.”
Global semiconductor revenue is projected to climb 64% to $1.3 trillion this year, research firm Gartner reports. Semiconductor and chip equipment companies in the S&P 500 are anticipated to boost earnings by roughly 95% this year, up from an expected 62% increase as of January 1, according to Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.
“When you think about the fundamentals that are driving many of these companies, I think that there is still room to run,” said Ayako Yoshioka, senior investment strategist at Wealth Enhancement, whose firm’s holdings include AMD and Micron, although she said the group could be due for a pause.
Technical indicators suggest the semiconductor trade may be overextended. The relative strength index reached 85.5 on a weekly basis Friday for the Philadelphia SOX semiconductor index, marking its most “overbought” level since the technology bubble peak in March 2000.
“When something is overbought, it can stay overbought for some time,” Edwards said. However, he added, “technicals have a way of reversing themselves, and unfortunately, that can be a whipsaw.”
Any deterioration in AI momentum could impact semiconductor stocks. Jack Ablin, chief investment officer at Cresset Capital, said his firm has favored semiconductor shares in some tactical portfolios, but he’s monitoring for signs of weakness.
“We will hold them even if they get expensive,” he said, “as long as they have positive momentum.”
