Chip Stocks Surge on AI Hopes Following Institutional Selling

Chipmakers Lead the Rebound

On July 20, buyers stepped right back in.

The Nasdaq 100 rose 2% as investors piled into chip stocks that had gotten cheaper. Nvidia announced that its newest chip designs are now reaching customers. Intel, which announced plans to cut more jobs, also saw its stock climb on the day.

The move came after hedge funds had been selling.

The UBS trading desk suggested that a chance to begin repurchasing stakes in chipmakers may arise as the decline in momentum stocks approaches its conclusion.

A Healthy Reset, Not a Breakdown

Adam Turnquist, a strategist at LPL Financial, said: "The recent correction appears more consistent with a healthy reset following a parabolic advance than a fundamental breakdown in the AI investment theme."

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The AI Investment Thesis Remains Intact

The central uncertainty is if the enormous investments in artificial intelligence will yield returns. Investors are gauging that as earnings season unfolds.

The semiconductor sector has been at the forefront of the AI boom, with companies like Nvidia and others seeing massive gains earlier this year. However, the recent pullback in momentum stocks prompted profit-taking by hedge funds, which had accumulated significant long positions. The bounce on July 20 suggests that many investors view the dip as a buying opportunity, reinforcing the narrative that AI-driven demand for chips remains robust.

This dynamic mirrors earlier periods of rapid AI adoption, where sell-offs quickly gave way to renewed buying when valuations became more attractive. The underlying thesis - that chipmakers are essential to powering AI infrastructure - has not wavered, even as short-term positioning shifts. The strong rebound following the fund reduction indicates that market participants still see long-term value in semiconductor stocks tied to artificial intelligence.

The selloff itself was relatively concentrated. While overall hedge fund exposure to momentum and chip stocks fell by roughly 5% of gross market value, many institutional investors retained core positions in AI leaders like Nvidia, suggesting the reduction was tactical rather than a wholesale abandonment of the sector.

What Earnings Season Will Tell Us

This week, Tesla and Alphabet report earnings on Wednesday. Microsoft, Meta, Apple, and Amazon follow in the week after.

So far, earnings season has been strong.

According to Bret Kenwell of eToro: "The burden of proof has changed. Investors are no longer asking whether companies can withstand the uncertainty." He added, "They want growth and guidance strong enough to justify elevated valuations."

Mark Haefele of UBS Global Wealth Management commented: "We see room for global stocks to move higher amid strong profit growth." He continued, "The wide gaps between individual stock performance and ongoing risks related to geopolitics and inflation, however, mean that investors should ensure diversified exposure."

Geopolitical tensions drive up oil prices, raising concerns about inflation that might prompt the Federal Reserve to increase interest rates. Bond yields rose.

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