NEW YORK, July 17, 2026 – U.S. chip stocks extended their sharp selloff on Friday, with the PHLX Semiconductor Index trading more than 22% below its June 22 record close. The index, now in bear-market territory, has fallen over 12% this week alone, as investors grapple with the implications of slowing growth in artificial intelligence-related spending.
The decline came despite strong quarterly results from Taiwan Semiconductor Manufacturing Co. (NYSE:TSM). The world's largest contract chipmaker reported second-quarter revenue of $40.2 billion, up 33.7% year-over-year, with gross margins reaching 67.7%. TSMC also guided third-quarter sales to between $44.6 billion and $45.8 billion, and raised its 2026 dollar-revenue outlook to slightly above 40% growth. Chief Executive C.C. Wei described AI-related demand as “extremely robust,” and the company lifted its capital budget to a range of $60 billion to $64 billion.
However, the revenue mix has sparked concern. High-performance computing (HPC) accounted for 66% of TSMC's sales in the second quarter, up from 39% in the same period in 2021. Implied HPC revenue surged from about $5.2 billion to $26.5 billion, representing roughly 79% of TSMC's total revenue increase over the past five years. In contrast, smartphone revenue rose only 58% during the same period, while total company revenue more than tripled.
This concentration makes semiconductor equities a “second-derivative trade,” according to analysts. While spending on AI infrastructure remains enormous, the growth rate is set to decelerate sharply. UBS Group AG (NYSE:UBS) projects hyperscaler capital expenditures will jump 76% to $673 billion this year, but then slow to 25% growth in 2027 and just 6% in 2028—a two-year deceleration of 70 percentage points.
Longer-term demand still appears powerful. McKinsey's base case values the semiconductor market at $1.6 trillion by 2030, up from $775 billion in 2024, implying about 12.8% annual growth. Most gains are expected to come from leading-edge chips and high-bandwidth memory. These forecasts are not contradictory; they describe durable demand alongside much slower incremental growth, and that gap now drives valuation risk.
By 10:50 a.m. EDT, TSMC's American depositary receipts were down 1.9% at $402.09. Nvidia Corp. (NASDAQ:NVDA) lost 1.6% to $203.98, Advanced Micro Devices Inc. (NASDAQ:AMD) fell 2.0%, and Applied Materials Inc. (NASDAQ:AMAT) dropped 4.4%. Micron Technology Inc. (NASDAQ:MU) bucked the trend, gaining 1.0%. The VanEck Semiconductor ETF (NASDAQ:SMH) fell 2.2%, reflecting the broad nature of the retreat.
The sector is caught between two competing narratives: AI has either reset the old chip cycle, or merely stretched it. Friday's mixed move in memory stocks did not settle the issue. Positioning has worsened the decline; a July survey found 82% of managers called semiconductors the market's most crowded trade, with none reporting a short position. Chip-focused funds drew a record $10 billion through May.
Toni Meadows, investment head at BRI Wealth Management, noted that valuations had “priced near-perfect demand.” While recent results were strong, expectations were even stronger. The next test comes from Alphabet Inc. (NASDAQ:GOOGL) and Intel Corp. (NASDAQ:INTC), both due to report next week. Alphabet's capex outlook may matter more than reported chip shipments.
The risks run both ways. Fresh capex upgrades could restart the rally, but tighter financing, power constraints, or local opposition to data centers could deepen the reset. For investors, the decisive number is now the gap between spending growth and supplier expectations. TSMC showed demand remains strong, but Friday's tape suggested that strong may no longer be enough.
