Chip stocks are too crowded! JPMorgan warns: Once VaR triggers "passive forced selling," AI trading may see a stampede-style pullback.

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Behind the frenzy of AI mania propelling the global semiconductor sector to record highs, Wall Street is quietly sounding the alarm.

JPMorgan’s latest report points out that the current rally in chip stocks is accompanied by rising volatility, triggering a risk alert. As more institutions adopt VaR position management frameworks, once volatility crosses the risk control threshold, institutions will be forced to reduce positions even if they remain optimistic about AI in the long term, potentially unleashing a chain reaction of sell-offs.

Even more concerning, semiconductor sector valuations and holdings are both at historical extremes, with crowded trading clearly visible. Once passive reduction begins, it will create a self-reinforcing cycle of “price declines—volatility increases—forced selling—further price declines,” potentially causing a sharp correction unrelated to fundamentals, and spreading to a broader range of tech stocks.

AI Trades Are Too Crowded

Chip stocks are currently the most crowded trade in the market. The Philadelphia Semiconductor Index saw a pullback of over 10% early this month amid worries of overheated AI trades, but quickly rebounded to a record high. Bank of America’s latest fund manager survey also confirms that going long semiconductors is the world’s most crowded position.

AI capital expenditure expansion, surging computing power demand, and upward earnings forecasts continue to attract capital inflows. However, highly concentrated positions mean that any negative catalyst could amplify volatility. JPMorgan notes that the main risk does not lie in fundamentals but in position concentration. If volatility rises, some investors may be forced to reduce holdings, potentially causing a significant correction diverging from fundamentals.

Valuation Expansion Far Outpaces Fundamental Improvement

Aside from trading structure risks, JPMorgan further notes that valuation levels in the semiconductor industry are continuing to climb. The bank’s analysis shows that the rate at which semiconductor companies’ weighting in global major stock indices increases has far exceeded the pace of their revenue share growth—the ratio is now about 6 times, more than double that of S&P 500’s “Magnificent Seven.” This indicates the valuation expansion granted to this sector by capital markets is significantly faster than fundamental growth.

Driven by the AI investment boom, investors are willing to pay a high premium for future growth. However, the sector’s weight, attention, and capital concentration have continued rising, making semiconductors a major source of global stock market volatility.

JPMorgan warns that high valuations, crowded trades, and rising volatility together will sharply increase the market’s vulnerability to sudden events. For the chip sector that is currently leading global gains, the biggest risk may not be slowing growth, but a “technical stampede” triggered by risk management mechanisms.

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