The AI chip trade cracked this week, and the hunt for what replaces it has begun

TL;DR

Semiconductor stocks lost 12% in two sessions while the Dow hit a record, as investors rotated from AI chip makers to enterprise software companies. A weak jobs report crushed rate-hike odds.

The trade that defined the first half of 2026, buying anything with proximity to a GPU, broke apart in the holiday-shortened week before Independence Day. The PHLX Semiconductor Index, which had surged more than 80% in the first half, sank 6.3% on Wednesday and 5.4% on Thursday, a two-session decline of roughly 12%.

While chip stocks cratered, the Dow Jones Industrial Average closed at a record 52,900 on Thursday, lifted by a 5% surge in Apple after Bloomberg reported the company had instructed suppliers to prepare 10 million foldable iPhones for a launch this autumn. All three major indices finished the week higher despite the rotation.

The numbers behind the crack

Micron Technology led the decline, falling more than 10% on Wednesday alone. SanDisk, Applied Materials, and Lam Research all dropped roughly 10%, while Intel and Marvell each lost about 9%.

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The selling intensified after reports that SK Hynix was slowing its expansion of high-bandwidth memory production, a signal that the supply side of the AI infrastructure boom may be catching up with demand. Equipment makers ASML, KLA, and Applied Materials all fell between 5% and 6%, suggesting investors are pricing in a slowdown in chip-factory orders.

The damage to chip stocks happened against a backdrop of broader macro uncertainty. June nonfarm payrolls came in at just 57,000, roughly half the 110,000 consensus estimate, and revisions to April and May cut a combined 74,000 jobs from previous tallies.

The unemployment rate dipped to 4.2%, but only because the labour force participation rate fell to 61.5%, its lowest level since March 2021.

Where the money went

The rotation was not a flight from AI but a repricing of where the returns will come from. Enterprise software stocks, led by ServiceNow, Snowflake, and Palantir, have been the primary beneficiaries, with the iShares Expanded Tech-Software ETF up 35% from its April low.

Snowflake surged 36% in late May after reporting strong earnings, adding 616 net new customers and lifting its count of million-dollar accounts to 779. ServiceNow, Oracle, and Palantir each rallied 6% to 8% in the session that followed.

The logic is straightforward. Investors spent two years paying premium multiples for the companies that supply AI infrastructure, and now they want evidence that it is generating revenue for the companies that deploy it.

Palantir’s Q1 revenue hit $1.63 billion, up 85% year over year. ServiceNow has projected $30 billion in subscription revenue by 2030, with roughly a third attributed to its AI product, Now Assist.

The valuation question

The first half left all three major indices in strong shape. The S&P 500 gained 9.6%, the Nasdaq rose more than 12%, and the Dow climbed 8.9%, its best first-half performance since 2021.

But the Shiller CAPE ratio sits at 38 to 40, second only to the dot-com peak of 44, and market concentration in the largest technology stocks has exceeded year-2000 levels. The difference, proponents argue, is that this time the companies are among the most profitable in corporate history, with Nvidia alone reporting net income exceeding $120 billion for fiscal 2026.

The counterargument is that profitability at the top of the supply chain does not guarantee profitability in the middle. Hyperscalers are on track to spend more than $650 billion on AI infrastructure in 2026, and the question that spooked markets in the holiday-shortened week is whether anyone below Nvidia in the stack will earn returns that justify those prices.

What the Fed changes

The weak jobs report reshaped the interest-rate picture overnight. The probability of a Fed rate hike at the 29 July meeting collapsed to about 22%, with a hold now the overwhelming favourite at 78%.

Fed chairman Kevin Warsh called the jobs picture “steady” and continued to emphasise his commitment to the 2% inflation target, without offering forward guidance on the rate path. A Fed that stays on hold gives equity markets one less reason to sell, but it also removes the catalyst that had been supporting bank stocks and the dollar earlier in the quarter.

What to watch

The market reopens on Monday with Q2 earnings season approaching. The results that matter most will come from the AI software layer: whether Snowflake’s customer additions accelerate, whether Palantir’s commercial pipeline converts, and whether ServiceNow’s AI attach rate holds at the levels it projected.

If the software companies deliver, the rotation will look prescient. If they disappoint, the AI trade will face a harder question: what happens when the infrastructure is built and the applications do not come.