Wall Street’s chip index enters bear market! Is the AI bubble finally going bust?

The Philadelphia SE Semiconductor Index dropped nearly 2% on Friday, crashing around 10% overall in the week to record its largest weekly fall in over a year. The chip index, however, remains more than 60% higher this year, despite the recent sell-off.

Adding to the already existing worries around massive investments in AI by the hyperscalers, Chinese AI startup Moonshot unveiled a model that it said is the world’s largest open-weight AI system, rekindling investor scrutiny of the pace of potential returns from hefty AI investments by US tech companies.

S&P 500 and the tech-heavy Nasdaq dropped more than 1% each on Friday, while Dow Jones Industrial Average fell nearly 0.8%. For the week, the S&P 500 ended down 1.55% while the Nasdaq fell 2.9% and the Dow lost 0.93%.

Meanwhile, South Korea’s Kospi, which is often considered the face of the massive AI rally seen earlier this year, continued to remain in the bear market despite being up nearly 62% for the year.

Japan’s Nikkei fell into correction territory on Friday, and Europe’s tech sector is among this week’s top losers after its biggest quarterly jump since 2001 in June.

Also read | Wall Street Week Ahead: Alphabet, Intel results in focus for AI trade as US earnings rev up

“The pullback reflects profit-taking and rising scrutiny of AI capex sustainability,” Reuters quoted Toni Meadows, head of investment at BRI Wealth Management, as saying. “Valuations in semiconductor stocks had priced near-perfect demand, for what has been a cyclical area in the past, so was always going to leave stocks vulnerable at some point in what has been a rapid rise,” he added.

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“I don’t think it has really anything to do about fundamentals as much as just repositioning of portfolios and just taking profits in stocks that have gone crazy,” the report quoted Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.

Legendary investor Warren Buffett recently acknowledged that he “made a mistake” by not investing in Alphabet sooner, although it was not among his favourites. “I would say that I don’t like it as well as at least four or five other businesses that we own. The real question with Google and all of its competitors now, because they are all laying out hundreds of billions, and that is real money. That is the game they are playing now. They weren’t playing that game with computer software,” he told CNBC.

Also read | Warren Buffett says he initiated Berkshire’s Alphabet bet, but it is not his favourite. Here’s whyHe often explained why he avoided buying tech stocks, as he did not really understand how they were making money – a decision that he later said cost a lot of money for Berkshire investors.

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