Why the SOX “Bear Market” Isn’t Foreboding

In recent weeks, the widely watched Philadelphia Semiconductor Index (SOX) has slid lower, breaching -20% from its June 22 peak on Friday. Now many are calling it a bear market—and a harbinger of doom for stocks broadly, especially because of the widespread (mistaken) view the whole bull market hinges on AI and Tech. The big problem with this: One set of stocks isn’t a leading indicator for others. While semiconductors may have gotten a bit over their skis (especially in South Korea), that doesn’t mean the rest of the market has, too.

No question some areas of the market like AI and Tech seem frothy. Hype galore for months has led mega IPOs, increasing leverage and lofty long-term projections. Pockets of froth like South Korea show mania emerging. Rapid margin debt expansion there to record levels and new single-stock, leveraged ETFs have spurred record trading volumes—and volatility—suggesting widespread speculative “FOMO” heat chasing had taken over. Anecdotally, Korean brokers reported new account openings for kids under 18 up 10-fold in the first quarter from a year ago.^[i] Now, stocks are (in our opinion) the best way for investors to build generational wealth, but when so many—so fast—see them as a get-rich-quick scheme, it signals caution evaporating and excessive optimism building. When sentiment overheats to that degree, it doesn’t necessarily matter in the short term how strong the fundamental case is. You can still get a near-term boom and bust as greed and fear spin on a dime.

Though sentiment-driven pullbacks are impossible to time, this appears to be occurring now. Although still up a world-beating 60.1% year to date, the KOSPI—Korea’s equity benchmark—has plunged -26.0% from its June 22 peak.^[ii] This is heavily influenced by just two stocks, but it is notable in light of Tech sentiment broadly. Then too, a recent AI-fueled mega IPO is nearly a third off its post-listing peak and well below its debut.

The SOX selloff is part and parcel of stretched categories’ reality check. But that is also markets’ run-of-the-mill day job: weighing expectations against reality—sectors and industry groups routinely see big swings under the surface as they clash. Just this year, for example, the S&P 500’s Energy Equipment & Services industry was off as much as -21.9% from its April high, yet you don’t read much about it.^[iii] Or take the SOX’s -24.9% tumble in 2018, -24.7% drop in 2015 or -30.5% slide in 2011—all of which occurred during 2009 – 2020’s bull market.^[iv]

Meanwhile, the MSCI World Index hit new highs last week.^[v] Though semiconductors are roughly 14% of MSCI World market capitalization, it isn’t enough to derail broader global markets on its own.^[vi] Global growth and fundamentals swamp local.

To see why, ask: What ails them? Semiconductors’ fundamentals remain sound, with their earnings—and 3 to 30-month outlook for them—surging as AI demand outstrips their ability to supply the chips to run swiftly advancing models. By the same token, however, non-stop coverage of this helped fuel ever-escalating expectations. This propelled investors to pile into the group, pre-pricing even that strong reality and stretching expectations. When expectations are lofty, even good results can disappoint.

The latest news that Chinese open-weight models’ capabilities match America’s proprietary best—and are potentially free to all—also sparked fear that will undermine semiconductors’ profitability outlook somewhat. But that is a repeat of earlier wobbles and worries. And it is just business—it isn’t a knock on stocks overall. Competition is, overall, a plus—one that can help inject more grounded thinking into the space. Companies globally—of all stripes—may now be in better position to use AI profitably themselves, perhaps sparking even more chip demand down the road.

For investors, an isolated tantrum like this can help reset sentiment toward a frothy pocket. By taking some of the air out and deflating expectations—at least for the time being—it lowers the risk of outrunning reality. Will that happen here and now, with the SOX specifically, and AI and Tech more generally? It isn’t clear. Short-term sentiment swings are unpredictable. But regardless, the MSCI World’s record high July 15—amid the SOX’s slide—shows AI and Tech aren’t everything.^[vii]