Chips Broke 20%. Earnings Haven't.

GOOD MORNING, The AI trade enters the weekend looking much weaker than the earnings backdrop underneath it. The Philadelphia Semiconductor Index ended Friday 20.2% below its June high, formally entering bear-market territory after its worst week in more than a year. Yet second-quarter S&P 500 earnings are still tracking roughly 26% above last year, and about 90% of companies that have reported are beating expectations. At the same time, Iran-related shipping disruptions pushed Brent higher again. The market is not pricing an earnings recession. It is repricing how much investors should pay for AI growth when leverage, capex and geopolitical risk are all rising.

MARKETS | TLDR

Wall Street ended Friday lower across all three major indexes: The Dow fell 0.77%, the S&P 500 lost 1.01% and the Nasdaq dropped 1.40% as the chip selloff broadened into a wider risk-off move.
Semiconductors crossed into bear-market territory: The Philadelphia Semiconductor Index finished 20.2% below its June 22 record close after its steepest weekly decline in more than a year, even though it remained more than 60% higher for 2026.
Oil rose as Hormuz shipping deteriorated again: Brent climbed about 3% Friday as U.S.-Iran attacks escalated and energy traffic through the Strait of Hormuz and Red Sea came under renewed pressure.

AI SELL-OFF

AI Valuations Broke Before AI Earnings Did

The Philadelphia Semiconductor Index closed Friday 20.2% below its late-June record, crossing the conventional threshold for a bear market. The index has fallen more than 18% in July and posted its worst weekly decline in over a year. Nvidia, Intel and Applied Materials were among the names caught in a selloff that had begun in semiconductors and spread into megacap technology, with Meta down 2.7% and Alphabet down 3.2% Friday.

The striking part is that earnings have not collapsed with prices. Roughly 90% of S&P 500 companies that had reported were beating expectations, and aggregate second-quarter earnings growth was tracking around 26% year over year. The semiconductor index itself was still up more than 60% for 2026. That makes this less a fundamental bust than a reset in the price investors are willing to pay for a trade that had become extremely crowded.

Leverage makes that reset more dangerous. Reuters reported growing use of retail margin, leveraged semiconductor ETFs and short-dated options, while large hedge funds had begun trimming exposure to top AI-infrastructure names. When a trade is crowded and leveraged, small changes in expectations can become large price moves. The next question is whether Alphabet, Intel and the rest of earnings season can reconnect extraordinary profit growth with valuations that ran even faster.

HORMUZ

Only Three Commodity Ships Crossed Hormuz

Shipping through the Strait of Hormuz deteriorated sharply again this week. Only three commodity vessels crossed on Thursday, according to shipping data cited by Reuters, down from a pre-war daily average of roughly 125. No Very Large Crude Carriers or LNG tankers crossed for a second consecutive day, while Iraq temporarily suspended loadings at its Basra terminal after a drone strike on a tanker.

That matters even if crude has not returned to the extreme highs seen earlier in the conflict. Hormuz is the world's most important oil-and-gas chokepoint, and persistent disruption can raise freight costs, insurance premiums and energy prices without a formal closure. Iran's Revolutionary Guards said no oil or gas would move through the strait while U.S. attacks continued, while Tehran also signaled it could encourage Houthi forces to increase pressure around the Bab al-Mandeb entrance to the Red Sea.

For markets, the transmission remains inflation and rates. Cooler U.S. CPI and PPI data this week reduced the urgency for a July Fed hike, but renewed energy disruption can quickly reverse that relief if it persists. The key distinction is duration: a short geopolitical premium is manageable; weeks of constrained shipping start to become an economic input.

HEADLINES

Some AI investors are rotating away from chip suppliers: UBS expects hyperscaler capex growth to slow from 76% this year to 25% in 2027 and 6% in 2028, pushing some managers toward cloud platforms, software and AI adopters instead of the hardware names that led the rally.
Netflix fell more than 10% after a cautious forecast: The reaction showed how unforgiving valuations have become when a high-quality growth company offers less visibility or momentum than investors expected.
The Magnificent Seven mostly fell with semiconductors: All but Apple declined Friday, showing that the AI pullback had moved beyond component suppliers into the broader megacap complex.
Consumer sentiment reached a five-month high: The improvement offered an important counter-signal — the equity selloff was being driven more by positioning and valuation than by an obvious collapse in the U.S. consumer.
Second-quarter earnings remained a strong fundamental floor: S&P 500 earnings are expected to rise about 26% year over year, setting up a direct test of whether strong profits can stabilize a market struggling with AI valuation and geopolitical risk.

UPCOMING

Alphabet and Tesla earnings — July 22: Alphabet is the first hyperscaler to report and any change to its AI capex plan could ripple through the entire semiconductor and data-center trade; Tesla adds another read on capital intensity and growth expectations.
ECB decision — July 23: The ECB is expected to pause after June's rate hike, but renewed oil volatility means traders will focus heavily on its guidance for September.
Intel earnings — July 23: Intel's results will test whether strong AI and data-center demand can stabilize chip valuations after the sector's 20% drawdown.
FOMC meeting — July 28–29: Cooler inflation reduced pressure for an immediate move, but persistent energy disruption keeps the possibility of additional tightening later in the year alive.

DEEP INSIGTHS

Among AI Crowd, Some Investors Position for Slower Hyperscaler Spending Growth

Read this for the capital-allocation shift underneath the semiconductor rout. The important point is not that AI spending is about to collapse. It is that spending growth may slow sharply even while absolute capex remains enormous, which changes who benefits most from the next phase of the cycle. The piece also highlights rising external financing and weaker bond-demand coverage as constraints that could eventually force more spending discipline.

Inflation Limbo

This is useful macro context for the Iran shock. Despite severe disruption around Hormuz, energy prices have remained well below the crisis peaks seen earlier in the year, allowing central banks to stay patient. The piece explains why the market can simultaneously price geopolitical risk and relatively contained near-term inflation — and why the duration of the shipping disruption matters more than any single day's oil move.