Chips Entered a Bear Market. Earnings Get the Vote.

GOOD MORNING, The AI trade enters a critical earnings week after its first real break of the year. The Philadelphia Semiconductor Index ended Friday more than 20% below its June peak, formally entering bear-market territory even as analysts still expect extraordinary profit growth from the sector. The selloff is no longer about whether AI demand exists. Investors are starting to question how long hyperscaler spending can keep accelerating — and whether the best returns now sit with the companies buying the infrastructure rather than the chipmakers selling it. Oil and Middle East risk remain an uncomfortable macro backdrop. Alphabet gets the first chance this week to change the conversation.

MARKETS | TLDR

Wall Street ended the week lower as the chip rout broadened: The major U.S. indexes closed lower Friday, while the Philadelphia Semiconductor Index moved 20.2% below its June high and into bear-market territory.
The AI unwind spread beyond a few chip names: Meta and Alphabet also fell as investors reassessed valuations and the durability of the infrastructure-spending cycle that powered the first-half rally.
Oil remained a macro risk after renewed U.S.-Iran escalation: Brent climbed about 3% Friday as attacks intensified and shipping through the Strait of Hormuz and Red Sea faced renewed disruption.

CHIPS

The AI Trade Just Entered Its First Bear Market

The Philadelphia Semiconductor Index ended Friday 20.2% below its June high, crossing the conventional threshold for a bear market. The selloff capped the sector’s worst week in more than a year and left the index down more than 18% in July, even though AI infrastructure remains one of the strongest areas of global capital spending.

That gap between fundamentals and price action matters. Semiconductor earnings are still expected to rise sharply, but the market had already priced in years of exceptional growth. Strong results from major chipmakers have increasingly failed to produce strong stock reactions, suggesting investors are no longer satisfied with proof that demand is healthy. They want evidence that growth can remain extraordinary enough to justify valuations built during the first phase of the AI boom.

The next test is earnings. Alphabet reports Wednesday, followed by Intel Thursday, with Microsoft, Meta, Amazon and Apple the following week. The AI trade does not need another demand story; it needs a return story. If hyperscalers show that infrastructure spending is accelerating revenue and cash flow, the chip pullback can look like a reset. If spending keeps rising faster than monetization, the sector may have further to reprice.

AI CAPEX

Investors Are Starting to Move Up the AI Stack

Some active investors are beginning to reduce exposure to semiconductor suppliers and rotate toward hyperscalers, software companies and industries that could benefit from AI adoption. The logic is not that AI capex is about to collapse. UBS estimates hyperscaler spending could still grow 76% this year and 25% in 2027. The issue is that growth could slow to just 6% in 2028.

That shift matters because chipmakers have benefited from the acceleration of spending, not simply its absolute level. If Microsoft, Amazon, Alphabet and Meta continue to spend hundreds of billions of dollars but the growth rate of those budgets slows, suppliers can still post enormous revenue while losing the multiple investors were willing to pay for perpetual acceleration.

There is also a financing angle. Hyperscalers are increasingly using debt and external capital to fund AI infrastructure, while local resistance to new data centers is starting to create physical constraints in some markets. The AI boom remains large. But investors are beginning to ask where the next dollar of economic value accrues — to the hardware supplier, the cloud owner, the software layer or the companies using AI to cut costs.

HEADLINES

Netflix fell more than 10% after another cautious forecast: The company’s slower growth outlook and decision to reduce viewership disclosures reinforced how quickly premium valuations get punished when transparency or momentum weakens.
S&P 500 earnings season started stronger than the tape suggested: About 90% of companies that had reported were beating expectations, while aggregate second-quarter earnings growth was tracking around 26% year over year.
U.S.-Iran fighting moved deeper into infrastructure: Both sides targeted logistics and infrastructure while shipping near Hormuz and the Red Sea came under additional pressure, keeping energy risk elevated into the weekend.
Consumer sentiment improved to a five-month high: The improvement offered a counter-signal to the equity selloff, suggesting the real economy had not deteriorated as sharply as tech valuations.
The ECB is expected to pause after June’s hike: Oil remains below the extreme levels seen earlier in the conflict, giving policymakers room to wait — but the renewed escalation means September tightening is still in play.

UPCOMING

Alphabet and Tesla earnings — July 22: Alphabet will provide the first hyperscaler read on whether AI-driven cloud growth is keeping up with infrastructure spending, while Tesla faces scrutiny around margins, autonomy and AI investment.
ECB decision — July 23: The ECB is expected to hold rates after hiking in June, but renewed energy volatility means its inflation guidance may matter more than the decision itself.
Intel earnings — July 23: Intel’s results will test whether the AI infrastructure cycle is broad enough to improve demand outside the market’s biggest GPU winners.
FOMC meeting — July 28–29: The Fed meets with oil and long-term yields elevated, leaving investors focused on whether policy can stay on hold if the energy shock persists.

DEEP INSIGTHS

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

Read this for the next phase of the AI trade. The key distinction is between spending that remains enormous and spending that keeps accelerating. If hyperscaler capex growth slows from 76% this year toward single digits by 2028, the investment winners can rotate even while the underlying AI buildout continues.

Chip Stocks Hit a Rocky Patch. What’s Next?

This provides the valuation context behind the bear-market move. Semiconductor stocks entered July after an extraordinary rally, with the sector still up sharply for the year and many names already near analyst price targets. AI demand remains powerful, but the article shows why high expectations, fund outflows and rising short interest can make even excellent earnings insufficient.