Investors should brace for more sharp stock-market pullbacks like Tuesday's rout. They are quickly becoming a feature of this bull market.
Shares of the world's largest tech companies have taken a backset this year to beneficiaries of their artificial-intelligence spending blitz, with semiconductor stocks taking a leading role in driving the market higher.
The latest chapter started when the early AI stalwarts began serving as the next kingmakers of the market. After driving much of the market's gains in 2023 and 2024, shares of the "Magnificent Seven" started to lose steam in 2025.
This year, they have been dramatically outpaced by big gains in semiconductor stocks trading in the U.S. and South Korea. Investors appear to have shifted their focus from the Magnificent Seven to the beneficiaries of their aggressive spending.
"The chip companies have been the recipients of the massive increases in capital spending," Ayako Yoshioka, senior investment strategist at Wealth Enhancement, told MarketWatch. "The hyperscalers were the check writers and the chip companies have been cashing those checks."
The easiest way to see this shift play out in markets has been to watch the popular Roundhill Magnificent Seven ETF MAGS tumble into correction on Tuesday, cementing a close at least 10% below its prior peak.
The fund tracks the elite group of seven megacap tech stocks: Microsoft $(MSFT)$, Nvidia (NVDA), Meta Platforms (META), Tesla $(TSLA)$, Amazon.com (AMZN), Apple $(AAPL)$ and Google parent Alphabet $(GOOG)$ - a list that includes many of the major AI hyperscalers.
And as investors hunt for the next AI bottleneck, leadership could continue to evolve.
A bounce in tech stocks on Wednesday, a day after the sharp selloff, had the MAGS ETF up 3.3% on the year, while the benchmark PHLX Semiconductor Index SOX was 101% higher, according to FactSet.
Investors have favored memory names like Micron Technology $(MU)$ and other hot bottleneck trades. But after such a dramatic run-up, it is likely that investor conviction in those ideas will be tested, according to Julia Hermann, global market strategist at New York Life Investment Management.
"At the equity level, semiconductor-related equities have structurally higher cyclicality and volatility than other tech incumbents," Hermann told MarketWatch.
The PHLX Semiconductor Index, for example, shows higher 90-, 180-, and 360-day volatility than the Magnificent Seven cohort since 2016, she noted. That's the year the earliest volatility data for the Magnificent Seven as became available as a separate group.
This volatility is likely to test conviction, especially when pairing it with a second dynamic: the IPO wave following SpaceX $(SPCX)$, which is set to include companies such as Anthropic and OpenAI that remain cash-flow negative, Hermann said.
On the heel's of SpaceX's historic IPO earlier this month, the company went out to the investment-grade bond market to borrow $25 billion this week.
For several years, stock-market leadership emanated from tech companies with spectacular earnings, low debt profiles and huge piles of cash. That's changed since last fall, when a historic borrowing spree to fund AI infrastructure commenced.
The new backdrop has Hermann's team recommending that investors focus on quality, diversification and not putting too many eggs in one basket. "They have been treated like a boring investment tenant that can be ignored in the past 15 years," she said of the low-rate environment. Now, she's bracing for more volatility and potential swings in market leadership.
Micron's earnings on Wednesday after the bell will be a gauge of appetite for the AI trade, especially whether powerful recent earnings that have been a major driver of stock-market gains lately look sustainable.
"I think it's premature to say that the AI story is over and investors have moved on," said Mark Hackett, chief market strategist at Nationwide's Investment Management Group. "But the people who benefited the most early from the AI buildout have already gotten the benefit of a lot of that growth, and now investors are starting to look at secondary and tertiary players in the AI space," he said.
Increasing AI-related debt loads signal that the opportunity tied to the buildout "is still very large," according to Yoshioka at Wealth Enhancement. But she also cautions investors "to be more vigilant in case there are any signs of oversupply across the AI supply chain."
The Dow Jones Industrial Average DJIA, S&P 500 SPX and Nasdaq Composite COMP were all trading higher Wednesday.
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