A single week drop of 10%, three consecutive weeks of sharp declines, a 20% pullback from the high! The "AI bull market leader" is experiencing one of the largest momentum sell-offs in history.

A single week drop of 10%, three consecutive weeks of sharp declines, a 20% pullback from the high! The "AI bull market leader" is experiencing one of the largest momentum sell-offs in history.

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U.S. semiconductor stocks have suffered their most brutal weekly decline in more than a year, with the Philadelphia Semiconductor Index pulling back over 20% from its June high, officially entering a technical bear market. The selloff has been characterized by Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, as "one of the largest momentum unwinds on record."

The Philadelphia Semiconductor Index fell nearly 10% this week, marking its largest weekly loss since the Trump tariffs shocked markets in April 2025. On Friday, the index fell another 1.6%, the Nasdaq Composite tumbled 1.4%, and the S&P 500 dropped 1%. This wave of selling has wiped out tens of billions of dollars in market value from chip and memory stocks.

The core of this turmoil is the large-scale unwinding by hedge funds and mutual funds of this year's hottest pair trade: "long semiconductors, short hyperscale cloud providers." As the market reverses direction, the inherent fragility of momentum strategies is being exposed, with the previous biggest gainers turning into the epicenter of the selloff.

Momentum Strategies Collapse in Unison, Three Weeks of ‘Shakeout’ Continue

The main driver of this downturn is not a sudden fundamental change, but a systematic unwinding of momentum trades.

Mueller-Glissmann points out that a popular trade among hedge and mutual funds this year has been to go long semiconductor stocks while shorting so-called "hyperscale" cloud operators. "The semiconductor narrative is widely accepted... For fast money and mutual funds, this is now probably a painful trade."

The Bloomberg index tracking momentum strategy performance has fallen 13% since tech stocks peaked in June, and is on track for one of its worst monthly performances since the index was formed in 2007—just this June, the index recorded its best month ever.

Momentum trading is widely favored among hedge funds, based on the logic of betting that strong stocks will keep rising, but once the market reverses, these strategies are vulnerable to crowded exits.

Strong Earnings Fail to Boost Confidence, Capex Expectations Spark Worries

Notably, this week’s selloff happened even after ASML and TSMC both delivered robust earnings reports, showing that market sentiment has overridden fundamental logic.

Michael Zigmont, co-head of trading at Visdom Investment Group, notes that the market is "uneasy" about TSMC’s forecast of increased capital expenditures in the coming years, sparking investor concerns about overinvestment in the industry. “The lesson is, even with stellar performance and an optimistic outlook, investors may still be dissatisfied… Investors might simply be looking for an excuse to sell certain stocks.” TSMC fell 7% on Friday alone.

Max Kettner, HSBC’s chief multi-asset strategist, warns that if chipmakers’ high earnings expectations are not met, the "painful unwind" of momentum trades may continue. "Earnings growth forecasts for semiconductor stocks are still extremely aggressive, in sharp contrast to the 'Magnificent Seven.'"

Selloff Spreads Globally, Asian Tech Stocks Hit Hardest

The selloff has crossed regional boundaries, with Asian tech stocks being hit hardest.

Japan’s Nikkei 225, a tech-heavy index, plunged 4% on Friday; Japanese chipmaker Kioxia plummeted more than 16% in a single day, and is now down more than 50% from its June high. Hao Hong, CIO of hedge fund Lotus Asset Management, attributes the sharp drop in Asian tech stocks to quant fund selling, labeling it as a “momentum crash.”

In the domestic market, AI startups Z.ai and MiniMax tumbled 28.5% and 15.6%, respectively, after rival Moonshot released a large language model on par with top American labs like Anthropic.

In Europe, the Stoxx Europe 600 index fell 0.3%, while ASML—the world’s largest chip equipment maker—slid nearly 4%. Musk’s SpaceX dropped 5%, its share price now below its IPO issue price last month.

At the individual stock level, memory chipmakers were hit hardest. Companies such as Micron and SanDisk were named as major losers in the “momentum unwind,” after previously attracting large inflows from trend-following funds because of their high sensitivity.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute individual investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their own circumstances. You are responsible for any investment decisions made on this basis. ```