Wall Street: Biggest rally of the year loses momentum; what's next?

The stocks that powered the artificial intelligence sector's strong rally on Wall Street are suddenly under pressure as investors assess rising tensions in the Middle East, take profits after a historic rally and reevaluate where to find investment opportunities.

After months of reaching historic records, shares of semiconductor manufacturers have fallen in recent weeks, putting pressure on the US stock market in general. The S&P 500 and Nasdaq Composite are down nearly 2% and 5%, respectively, from their all-time highs on June 2.

The leap in AI has catapulted chipmakers into the spotlight: The semiconductor and semiconductor equipment industry has accounted for nearly half of the S&P 500's market value gains this year, according to Mike O'Rourke, chief market strategist at JonesTrading.

But the speed and size of the rally fueled debate about its sustainability.

"The rally in semiconductor stocks has been overdone," said Jeff Buchbinder, chief equity strategist at LPL Financial. "Investors had exposure to technology stocks, particularly semiconductors, like never before."

The rise in chipmaker shares helped global markets recover from the drop at the start of the US-Israeli war with Iran this year. But after posting their best quarter ever, chipmakers are showing hesitation.

Companies are struggling as some investors are taking profits after sharp rallies. Others are evaluating big technology companies' plans for investment in AI infrastructure and how this could impact manufacturers' revenues.

Shares of chipmaker Micron Technology have fallen more than 20% since hitting an all-time high on June 25. The PHLX semiconductor index is down 15% since also hitting an all-time high in late June.

Volatile chips
Semiconductors, from memory chips to graphics processing units, are crucial to the growth of artificial intelligence.

High demand for chips, combined with tight supply, has allowed companies to raise their prices and secure lucrative long-term contracts, boosting profits and future revenue prospects.

Thus, despite recent volatility, chip manufacturers continue to perform very positively year-to-date. Micron is still up more than 200% this year, and the PHLX semiconductor index is still up 75%.

But as Wall Street gears up for another quarterly earnings season, earnings expectations continue to rise.

"The shares have been priced considering extremely strong future earnings growth, and the concern is that spending on AI infrastructure will not be able to keep memory prices rising indefinitely," Neil Wilson, strategist at Saxo Markets, said in a note.

So-called hyperscalers, or the big tech companies like Microsoft, Meta and Google that spend huge amounts of money to expand data centers and AI infrastructure, will come under scrutiny.

"The market is now looking beyond the deployment phase and increasing scrutiny on hyperscalers and others who are investing heavily in AI to ensure the returns will come," said LPL Financial's Buchbinder, "and this will be a key focus of the upcoming earnings season."

Investments in AI impact prospects for chipmakers. A slowdown in growth could spook some investors, as these manufacturers rely on upwardly revising their revenue projections based on robust demand and the continued expansion of AI.

"We've seen almost unbelievable volatility in some of these semiconductor stocks and memory companies," said Alonso Munoz, chief investment officer at Hamilton Capital Partners.

"This makes us even more hesitant to invest. I think we prefer to wait and see what the results will be in the coming weeks and in the second half of this year."

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Middle East risks renewed
In total, the S&P 500 index is up about 10% this year.

While stocks of semiconductor companies performed poorly, rotations into other sectors helped buoy the market.

Investors flocked to sectors such as financials and industrials, which caused the Dow Jones to close above 53,000 points for the first time in history earlier this week.

But the strength of the rotation also depends on whether the conflict in the Middle East remains contained. The Dow had its worst day in almost a month on Wednesday (8), after attacks exchanged between Washington and Tehran.

Investors are closely watching developments in the Strait of Hormuz and their impact on oil prices and Treasury yields.

The longer the uncertainty persists, the greater the risk to stocks at a time when the market leaders, semiconductor manufacturers, are in turmoil.

The S&P 500 Index has not fallen more than 10% from its most recent peak since March and April 2025. Investors are watching for any signs of weakness in the AI-driven rally that could turn into bigger declines.

"Another difficult day for semiconductor stocks highlights how much the bar for a successful earnings announcement has risen and how much the overall boom in technology stocks remains dependent on the performance of a handful of companies," said Jonas Goltermann, chief markets economist at Capital Economics, in a note released on Tuesday (7).

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Source: CNN