NEW YORK, July 16, 2026, 2:20 p.m. EDT. Semiconductor shares experienced a sharp decline of 5% on Thursday, as investors redirected their attention from robust AI demand to concerns about profit margins. The PHLX Semiconductor Index (INDEXNASDAQ:SOX) fell 5.0% to 11,780.39, marking a significant pullback in a sector that had been riding high on AI enthusiasm.
Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) reported a forecast of 12.4% sequential revenue growth for the third quarter, but its operating-margin midpoint dropped by 3.3 percentage points to 57%. This margin compression, driven by rising costs and capacity expansion, became the day's clearest signal for investors. TSMC also raised its 2026 capital spending midpoint by 14.8%, increasing pressure on near-term cash returns and contributing to the sector-wide selloff.
The decline was broad-based, with major chip stocks all in the red. TSMC's U.S. shares fell 3.6% to $404.21, while Nvidia Corp. (NASDAQ:NVDA) dropped 2.8% to $206.63. Advanced Micro Devices Inc. (NASDAQ:AMD) slid 6.7% to $493.58, and Marvell Technology Inc. (NASDAQ:MRVL) led the decliners with a 9.4% drop to $186.89. ASML Holding NV (NASDAQ:ASML) also slipped 1.3% to $1,792.41, despite raising its 2026 sales outlook.
The selloff signals a tougher investor test for the semiconductor industry. While demand continues to rise, the new capacity coming online is weighing on expected margins and cash returns. TSMC's third-quarter revenue midpoint of $45.2 billion, up 12.4% from the previous quarter, was overshadowed by the margin outlook. The company's second-quarter earnings, however, were strong: net profit of NT$706.56 billion (about $22 billion) rose 77.4% and topped estimates by 11.7%, with dollar revenue up 33.7%.
TSMC raised its 2026 revenue-growth outlook to slightly above 40%, up from a prior forecast of above 30%. Planned capital spending increased to between $60 billion and $64 billion, reflecting the company's aggressive investment in advanced nodes, particularly the steep two-nanometer ramp. Advanced nodes made up 77% of second-quarter wafer revenue, according to TSMC finance chief Wendell Huang, who cited "continued strong demand."
Upstream demand remains robust as well. ASML raised its 2026 sales range to €43 billion to €45 billion on Wednesday, with the midpoint about 16% higher than its prior range. The company plans to increase low-NA extreme-ultraviolet capacity by 30% in 2027 and is considering another 30% increase for 2028. Despite these positive signals, ASML's U.S. shares still slipped on Thursday.
The breadth of the selloff suggests investors are separating demand evidence from near-term stock upside. Earlier on Thursday, the PHLX Semiconductor Index was up 67.4% for 2026, but its later level was 19.6% below the 52-week high. "The AI trade isn't being priced on growth anymore. It's being priced on perfection," said Gene Goldman, Cetera's chief investment officer. He called Thursday's move a market pause.
The next test for the sector is utilization. New fabs must fill quickly for margins to recover, and chip designers need customer budgets to keep up. Risks include intraday price reversals before the close, but faster utilization could restore margins sooner. Conversely, delays or weaker AI budgets would increase the pressure on the sector.
