Chip Sector's $2 Trillion Drop in Eight Days Questions AI Hopes

The chip sector lost roughly $2 trillion in value over eight trading days, the worst such stretch since 2008. The decline was driven by yields exceeding 5% and skepticism about whether artificial intelligence investments will generate returns.

The Philadelphia Semiconductor Index, which tracks US-listed chip companies, rose on Monday. But members of CNBC's Investment Committee disagreed on whether the bounce represents an opportunity to buy or a temporary halt in a broader selloff.

Is the Selloff in Chip Stocks Driven by Rates, Not Demand?

Last week, the index fell over 11%, marking its eighth straight losing session.

An inflation report that exceeded expectations has increased the probability of interest rate increases by the Federal Reserve. According to minutes from the Fed's September meeting, a majority of officials viewed a rate hike in 2026 as probable.

At the start of trading Monday, the 10-year Treasury yield was 5.10%, as reported by Schwab.

A member of the panel noted that neoclouds — companies that borrow money to rent out AI computing capacity — are under pressure from elevated yields. According to the panelist, a decline in yields of 0.5 to 0.75 percentage points would alleviate that strain.

On the other hand, a different panelist was positive on hedge funds reducing their chip holdings, pointing out that November and December historically see strong stock performance. But a skeptical panelist argued that last week's market breadth favored healthcare and energy sectors over industrials like Caterpillar.

When Will AI Spending Peak: In One Year or Four?

The panel members offered different views on the timing of the AI spending peak, with projections spanning one to four years. One panel member referenced Micron, a memory chip manufacturer, pointing to its share repurchases and take-or-pay agreements that require customers to pay for chips even if they are not used. A different panelist responded that, as in previous cycles, those contracts provide scant protection after spending reaches its peak.

The next challenge will come from earnings reports. Lam Research, which supplies equipment for chip manufacturing, is set to announce results this week, along with Texas Instruments, Western Digital, Meta, Tesla, and SpaceX. A panel member stated that the crucial factor is the returns generated by AI investments, not promises that spending will persist. Consequently, with the 10-year yield exceeding 5%, investors are evaluating each AI earnings release relative to the cost of capital. This standard applies to all stocks tied to AI, ranging from chipmakers to the Magnificent Seven, the collection of the largest US technology firms.