For about three months, the S&P 500 Index has been stuck in a fairly tight trading range.
Yet, beneath the surface, there has been no shortage of market drama. Much of it can be seen in the action of the PHLX Semiconductor Index.
Well known among active traders, the index receives far less attention from long-term investors and is not well known to much of the investing public.
The index has been in existence for over 30 years. It is a modified market-capitalization-weighted index composed primarily of 30 large semiconductor and memory chip makers.
Why do we care? Demand for memory chips used in PCs and smartphones has soared due to massive demand from companies building AI data centers. As a result, chip prices are up.
It doesn’t take an advanced degree to understand that exceptionally strong demand, combined with rising prices, can drive profits sharply higher.
Investors certainly recognize that reality: the index doubled in the second quarter of the year before reaching its peak on June 22, according to data from the Wall Street Journal.
Demand for anything AI-related is off the charts
How off the charts? “The computing power of the total stock of AI chips has grown at 3.4 times per year, doubling every 7 months since 2022, based on revenue data, other financial disclosures, and analyst reports,” according to Epoch AI.
That said, trading in the index has been extremely volatile—both up and down.
Since the 22nd, it’s been mostly to the downside, entering a bear market four weeks after having peaked, i.e., a 20% decline. In total, the index shed nearly 30% before bouncing back at the end of July.
Why the tug of war between buyers and sellers? Investors are skittish about the huge outlays that have driven data-center-related stocks higher.
At its core, the question is whether companies spending hundreds of billions of dollars will earn an adequate return on that investment. As Moody’s recently noted, it is uncertain whether current AI demand is strictly driven by market demand or bolstered, at least in part, by investments from key industry players.
While questions remain about how these firms might meet their profit objectives, it’s hard not to stress that current demand for AI continues to be incredibly robust.
The recent pullback in semiconductor stocks may simply represent a healthy correction, helping to flush out excess optimism and speculative froth. When a trade becomes too crowded, it often reverses as excessive optimism gives way to a more balanced outlook.
But cash exiting semiconductor stocks hasn’t gone to the sidelines.
Instead, it has rotated into other sectors—what would be framed as a broadening in the rally. Groups that underperformed are seeing some support.
While prior winners have come under pressure, the economy continues to expand, and corporate profits are strong.
| Key Index Returns | ||
| July 2026 % | YTD % | |
| Dow Jones Industrial Average | 0.32 | 9.20 |
| Nasdaq Composite | -3.20 | 9.17 |
| S&P 500 Index | -0.13 | 9.41 |
| Russell 2000 Index | -3.08 | 18.11 |
| MSCI World ex-USA** | 2.00 | 9.74 |
| MSCI Emerging Markets** | -3.31 | 18.62 |
| Bloomberg US Agg Total Return | -1.30 | -0.69 |
In summary, we believe investors should avoid placing big bets on narrow sectors.
Stick with what you know best—diversification, patience, and a long-term time horizon.
Success is determined not by timing the market but by time in the market. As the legendary investor Warren Buffett has emphasized, “The stock market is a device for transferring money from the impatient to the patient.”
It beats chasing always-shifting trends and fads.
I trust you found this review to be insightful. If you have any questions or simply want to talk through your portfolio or other financial goals, please don’t hesitate to reach out to me or anyone on our team.
Thank you for choosing us as your trusted financial advisor. We deeply value your confidence and are honored to help you navigate your financial journey.
