Chip stocks have entered a bear market. A BofA analyst says not to panic.

By Britney Nguyen

The semiconductor sector is undergoing a reset and has a tendency to underperform in the third quarter

The PHLX Semiconductor Index fell again on Friday.

As the chip sector officially enters a bear market, a BofA analyst says the recent pressure is merely "a summer reset, not a fundamental reversal."

It's been a volatile stretch for the sector, with the PHLX Semiconductor Index SOX finishing in a bear market on Friday after seeing explosive gains in the first half of the year. The index ended the day down 20.2% from its all-time closing high achieved on June 22. A bear market is defined as a drop of 20% or more from a recent significant peak.

The index, which trades under the ticker symbol "SOX," saw choppy trading action in Friday's session, falling as much as 5.7% before briefly swinging into positive territory. It closed the session down 1.6%.

Bank of America analyst Vivek Arya attributed recent declines both to fundamental concerns about cost inflation in memory chips and to "seasonal mood swings" for the SOX, which he said has underperformed the S&P 500 SPX in the third quarter for 10 of the last 16 years. The underperformance comes on the heels of an 80% gain for the sector in the second quarter of this year, he said in a Thursday note.

Arya said he remains upbeat about semiconductor, networking and chip-equipment stocks, and he still expects artificial-intelligence spending to more than double to $1.7 trillion by the end of the decade.

Shares of Broadcom (AVGO) and Advanced Micro Devices (AMD) closed down about 1%, while shares of Intel (INTC) and Nvidia (NVDA) were off about 2%. Nvidia's market capitalization had fallen behind that of Apple (AAPL) earlier in the trading day, but the chip maker retained its status as the largest U.S. company by the market close.

The Friday declines were partly being driven by concerns over the release of Kimi K3 from Chinese AI model developer Moonshot AI. The 2.8-trillion-parameter open-weight model performs comparably to Anthropic's Fable 5 and OpenAI's GPT-5.6 Sol and is at an advantage due to its cheaper price, Jefferies analyst Matt Ma said in a Friday note.

"Whatever gap existed between American and Chinese frontier AI just got a lot smaller, and it happened on the exact morning Wall Street was busy convincing itself AI economics don't add up," Mark Malek, chief investment officer at Siebert Financial, said in emailed comments.

Meanwhile, Micron Technology's stock (MU) closed down fractionally, while Sandisk's stock (SNDK) fell about 4%. Storage makers Seagate Technology (STX) and Western Digital (WDC) saw their stocks rise 5.6% and 2.2%, respectively, on Friday.

Spending on memory chips accounts for about 35% to 40% of hyperscaler capital expenditures, Arya said, which is two to three times higher than it has been historically.

He expects both spot and contract pricing for memory components to remain durable in the current quarter and noted that spot prices for dynamic random-access memory have climbed for eight straight weeks, while pricing for NAND flash memory has also been stronger.

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Additionally, Arya said improved visibility into a multiyear cycle for AI infrastructure supports his expectations for the wafer fab equipment market to reach $190 billion in revenue in 2027, and $250 billion in 2028.

After Taiwan Semiconductor Manufacturing (TW:2330) raised its U.S. investment commitments to $265 billion, Arya said that "could further pressure" both Intel and Samsung Electronics (KR:005930) to increase U.S. spending, too. Additionally, ASML's (ASML) guidance for shipments of its deep-ultraviolet lithography and extreme-ultraviolet lithography machines to grow more than 30% annually in 2027 and 2028 - along with anticipation of price hikes for those products - provides a tailwind for the broader semicap sector, he said.

Shares of Applied Materials (AMAT) closed down 5.6% on Friday afternoon, while shares of KLA (KLAC) were down 3% and Lam Research's stock (LRCX) was off 2.4%.

-Britney Nguyen

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07-17-26 1649ET