Plunging 10% in a single week and three consecutive weeks of sharp declines, down 20% from the peak! The "AI bull market leader" experiences one of the largest momentum sell-offs in history

U.S. semiconductor stocks suffered their worst weekly decline in over a year, with the Philadelphia Semiconductor Index retreating more than 20% from its June highs, officially entering a technical bear market. This sell-off was described by Christian Mueller-Glissmann, Head of Asset Allocation Research at Goldman Sachs, as "one of the largest recorded momentum strategy sell-offs ever."

This week, the Philadelphia Semiconductor Index fell nearly 10% in total, marking its largest weekly drop since April 2025 when the Trump-era tariffs roiled markets. On Friday, the index fell another 1.6%, while the Nasdaq Composite slumped 1.4% and the S&P 500 dropped 1%. This round of selling has wiped out tens of billions of dollars from chip and memory stock market values.

The core of this turmoil is the large-scale unwinding by hedge funds and mutual funds of the year's most popular pair trade: "long semiconductors, short hyperscale cloud providers." As market direction reversed, the inherent fragility of momentum strategies became apparent, and the biggest previous gainers turned into the worst-hit in the sell-off.

Momentum strategies unwind in unison, with a three-week “shakeout” ongoing

The main driver of the current decline is not a sudden shift in fundamentals, but the systematic unwinding of momentum trades.

Mueller-Glissmann noted that this year, a popular trade among hedge funds and mutual funds was to go long semiconductor stocks while shorting so-called “hyperscale” cloud service providers. “The semiconductor narrative became highly embraced ... That now appears to be a painful trade for fast money and mutual funds.”

The Bloomberg index tracking momentum strategy performance has dropped 13% since tech stocks peaked in June, and is on track to register one of the worst monthly performances since the index was established in 2007. Remarkably, in June this year, the same index saw its best monthly gain since inception.

Momentum trading is highly favored by hedge funds, based on the logic of betting that strong stocks will continue to outperform. However, once the market reverses, such strategies face the risk of a concentrated stampede out of positions.

Strong earnings fail to boost confidence, capex outlook triggers concern

Notably, the sell-off occurred even after both ASML and TSMC released strong earnings reports, showing that market sentiment has overtaken fundamentals.

Michael Zigmont, Co-Head of Trading at Visdom Investment Group, pointed out that the market was “uneasy” about TSMC’s guidance for increased capital expenditures in the coming years, sparking concerns about industry over-investment. “The lesson is that even with impressive earnings and positive outlooks, investors can remain dissatisfied ... They may simply be looking for excuses to sell certain stocks.” TSMC fell 7% in a single day on Friday.

HSBC’s Chief Multi-Asset Strategist Max Kettner warned that if chipmakers' aggressive earnings expectations are not met, the “painful unwinding” of momentum trades could continue. “Earnings growth expectations for semiconductor stocks remain extremely aggressive, while the 'Magnificent Seven' tell an entirely different story.”

Selling wave spreads globally, Asian tech stocks the first to fall

This selling wave has crossed regional boundaries, hitting Asian tech stocks particularly hard.

Japan’s key tech index, the Nikkei 225, plunged 4% on Friday, and chipmaker Kioxia crashed over 16% in a single day, down more than 50% from June highs. Hao Hong, CIO of Lotus Asset Management, attributed the sharp drop in Asian tech stocks to quant fund selling, characterizing it as a “momentum crash.”

In domestic markets, AI startups Z.ai and MiniMax plummeted 28.5% and 15.6%, respectively, after rival Moonshot released a large language model with capabilities close to the top-tier U.S. labs like Anthropic.

In Europe, the Stoxx Europe 600 Index fell 0.3%, while ASML, the world’s largest chipmaking equipment supplier, dropped nearly 4%. Elon Musk’s SpaceX fell 5%, with its share price dipping below last month’s IPO price.

At the individual stock level, memory chipmakers have borne the brunt of this reversal. U.S. companies like Micron and SanDisk were cited as having the biggest drops in the momentum unwinding, as these high-beta names previously attracted massive trend-following capital inflows.