Investors blink on the AI trade

Catch up quick: Wall Street learned to love the stocks of semiconductor firms like Intel, AMD and Micron Technology this year.

• These companies sell the chips underpinning the massive AI buildout by the hyperscalers, and their stocks have soared by double- and triple-digit percentages this year.

The latest: This month, chips got crushed.

• The stocks "got to extremes," John Roque, head of technical analysis at 22V Research, a Wall Street research firm, tells Axios.
• "I think what we're seeing now is a correction. It's as rash now on the downside as it was rash on the upside."

By the numbers: Since hitting a record high on June 22, the closely watched iShares Semiconductor ETF, a fund that trades under the ticker SOXX and tracks 30 chipmaker industry stocks, has fallen 20%.

• The drubbing was even more brutal for Intel, down about 33%, and Micron, down nearly 30%.
• Nvidia, which was a high-flying chip stock before those other guys ever got out of bed this year, held up a bit better. It's now down close to 3% over the same period.

"Moves of the type we're seeing in semiconductors are incredibly rare," says Steve Sosnick, chief strategist at Interactive Brokers, describing them as "parabolic."

• "They tend to end unpredictably and in an ugly manner. And I think, to some extent, that's what we're seeing."

Yes, but: For the year to date, these stocks are still absolutely slaying: SOXX is up 66%, Micron 169%(!) and Intel 141%.

• And so far the stock market overall is holding up OK, as investors rotate into other equities.

State of play: Still, investor faith in the AI trade looks shakier. Investors are uncertain which of the hyperscalers will actually profit from their record spending on AI, Christopher Wood, global head of equity strategy at Jefferies, wrote earlier this month.

• "The new quarter has begun with much talk of 'AI fatigue' as investors look out for a peaking out of momentum."
• Still, Wood remains optimistic about AI picks and shovels more generally.

Between the lines: The recent moves down shouldn't be totally surprising. "There were some tells along the way," Sosnick says.

• He points out that Nvidia reported strong financial results in May, but its stock fell afterward. Something similar happened with Samsung.

The intrigue: South Korea's benchmark stock index, the KOSPI, is proving to be a bit of a canary in the coal mine.

• The KOSPI shot up by triple digits at its peak, driven largely by the stock prices of just two companies. It's now in bear market territory.
• Samsung and SK Hynix alone recently accounted for nearly half the KOSPI's total market value, per Roque's calculations.

Reality check: The U.S. market, however, is much less concentrated.

What to watch: Financial reports from Alphabet (Wednesday) and Intel (Thursday) are coming out this week — the AI trade's next stress test.

What's next: No one really knows what comes next, as Warren Buffett ruminated in Berkshire Hathaway's 2000 shareholder letter just as the dot-com bubble was bursting.

• "Nothing sedates rationality like large doses of effortless money," he wrote, comparing the behavior of investors to "that of Cinderella at the ball."
• "The giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."