The iShares Semiconductor exchange-traded fund, better known by its ticker SOXX, tumbled 12% on Thursday, marking its fifth decline in six sessions. It drove the S&P 500 to a massive 4.4% drop and the tech-heavy Nasdaq Composite to an even more painful 5.5% pullback on the day.
The indexes managed to claw back a portion of those losses on Friday, but not nearly enough to make investors whole, or wholly calm their nerves. It will likely take weeks, not days, for the worst performers to recover.
When the semiconductor trade was booming in May, Barron's warned that "nothing lasts forever" for chip stocks. The bad news is that we were right. But there is good news, too: Investors now have a much more attractive entry point if they choose individual names wisely.
The SOXX has dived 28% since the start of October and is down 38% from its all-time closing high on June 22. And no one in the semiconductor space has been spared.
The personal computer market is in shambles, making life difficult for Intel, which makes about half of its money from PC chips. Intel shares have plummeted 38% since the company reported a third-quarter contraction in its PC business last week.
Smartphone sales have been similarly weak in 2026, putting pressure on semiconductor suppliers such as Qualcomm and Arm Holdings. Both companies reported earnings that beat expectations but had some flaws after the close Wednesday. Their shares dropped 9.5% and 13%, respectively, on Thursday.
The most valuable chip makers are all dependent on hyperscalers' eye-watering investments in artificial-intelligence data centers. Nvidia, Broadcom, and Advanced Micro Devices -- among others -- make AI processors, while Micron Technology, SK Hynix, and Samsung Electronics supply memory.
The Democratic blowout in Tuesday's midterm elections -- particularly in governor and utility commissioner races in big data-center states -- has Wall Street worried that the AI buildout might slow. Analysts at Jefferies cut their 2030 forecast for new data-center capacity by about 8% in a research note Thursday. UBS says 30% of the capacity slated to come online in 2028 is now under threat.
To put a really ugly bow on things, the entire sector faces supply constraints that will limit returns for some companies, regardless of the extent of demand. Higher component costs are affecting the entire supply chain, including wafer fabrication and assembly, testing, and advanced packaging, Qualcomm warned in its earnings report.
The silver lining is that the sector's fundamentals still look attractive, even as the chip mania that kicked off 2026 has died down. Analysts polled by FactSet predict the iShares Semiconductor ETF's earnings will surge 51% to $10.39 a share next year, from an estimated $6.89 in 2026. Sales are projected to grow 38%, and margins are still creeping higher.
Valuations, meanwhile, have sky-dived back to earth. In June, the SOXX traded as high as 33 times projected 12-month earnings. It now trades at 14 times as of Thursday's close -- its lowest point since late 2022.
Valuations in the sector were already hitting new lows before the election, strategists at UBS pointed out.
"The slowdown is a negative for semis and AI infrastructure, but a lot is already priced into semis," the UBS group wrote of a potential data-center deceleration. Investors had also cut their semiconductor positions heavily, they said.
In other words, the bargain prices of chip stocks already reflect the worst of investors' fears.
Does that mean jump in head first? Maybe not. In May, we recommended five top-quality names -- Nvidia, AMD, Broadcom, Micron, and Taiwan Semiconductor -- when chip stocks were rising and a selloff looked likely. With a stock free-fall now afoot, that quintet still has a strong case.
To start, AI remains the No. 1 growth driver (and Nos. 2, 3, and 4) in semiconductors, and those stocks have been AI winners. Chips for PCs, smartphones, and even cars don't have nearly the same potential. Remember that brutal Intel report? Well, in the same quarter, Intel's data-center and AI segment revenue surged 78% year over year.
Fears of a total AI investment collapse might also be overblown. States are eager for jobs and tax revenue, and will welcome data centers if companies make appropriate environmental provisions and pay for their own power, argues JoAnne Feeney, a portfolio manager at Advisors Capital.
"We see the possible delays in data center buildouts as behind the selloff, but view those as just that: delays at worst," Feeney told Barron's. "Some valuations have become particularly attractive, and we see Broadcom and Nvidia as among those."
Nvidia, the world's second-largest company by market value, came into Thursday trading at just 13 times forward earnings, 30% lower than the S&P 500's multiple. The stock bounced back about 3% on Friday. Broadcom, which helps make custom chips for partners like Alphabet and OpenAI, was at less than 16 times earnings.
Valuations can always fall further, and we haven't even gotten to the nearly $900 billion in supply commitments from Anthropic, around which so much of the AI industry is orbiting. If Anthropic can't follow through on its commitments, its suppliers will see a chunk of demand evaporate.
But the moves over the past week have little to do with any new information from Anthropic. And unless you think a total collapse of the AI trade is imminent -- if not already under way -- chip stocks that looked expensive just a few months ago now appear downright cheap.
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