Global chip stocks plunge into bear market as AI doubts and US-Iran strikes rattle investors

Chip selloff accelerates

The Philadelphia SE Semiconductor Index fell 11% in the week to Friday, its steepest weekly decline since March 2025, and was down 24% from its late-June all-time high, confirming a bear market. The rout spread across Asia, where South Korea's KOSPI had already entered a bear market last week and tumbled a further 6% on Thursday. Japan's Nikkei 225 sank 4.03% on Friday to close at 64,141.12, down 11.3% from its June 25 record, entering correction territory. In the US, the tech-heavy Nasdaq 100 lost 1.7% on Friday, while the S&P 500 slipped 0.7%.

AI investment narrative tested

The selloff was fuelled by growing scrutiny of the returns on massive AI capital expenditure. Chinese startup Moonshot unveiled Kimi K3, a 2.8 trillion-parameter open-weight model that it claimed surpasses all but the most advanced systems from OpenAI and Anthropic, at a fraction of the cost. A separate report indicated Google's Gemini 3.5 Pro was months behind schedule. Toni Meadows, head of investment at BRI Wealth Management, said the pullback reflected profit-taking and rising scrutiny of AI capex sustainability.

Valuations in semiconductor stocks had priced near-perfect demand, for what has been a cyclical area in the past, so was always going to leave stocks vulnerable at some point in what has been a rapid rise.

In Tokyo, Kioxia Holdings tumbled 16.1%, its steepest one-day drop since November 2025, after its market capitalisation had briefly surpassed Toyota's last month. Daisuke Hashizume of Daiwa Securities noted that investors are worried that memory chip prices can rise sustainably. Yet Shoichi Arisawa of Iwai Cosmo Securities argued the business environment for AI and semiconductor demand had not changed.

Middle East escalation lifts oil

Geopolitical tensions compounded the market jitters. US forces struck bridges and an airport in Iran on Friday, while Tehran retaliated by hitting a power and desalination plant in Kuwait. The renewed intensity of fighting and the closure of the Strait of Hormuz pushed oil prices higher, though Brent crude remained around $85 a barrel, well below the wartime peak of roughly $118. Energy stocks gained in London, with the FTSE 100 edging up 0.3%, but airlines felt the pressure: Ryanair fell 2.55% in Dublin on fears of rising fuel costs.

Broader market fallout

The selloff hit other tech names. SpaceX shares dropped below their $135 IPO price for the first time on Wednesday and fell further on Friday after a Starship launch abort, leaving the stock down more than 30% from its record close on June 16. The pan-European STOXX 600 index slipped 0.34% to 641.53, while Dublin's Iseq 20 lost 1.9% on Friday, with Bank of Ireland and AIB posting weekly declines of 2.3% and 1.6%. US big banks reported strong second-quarter earnings, but that did little to stem the tech-led rout.

What analysts are watching

David Morrison of Trade Nation said some investors are questioning how long the current pace of growth can continue. The Philadelphia index remains up over 70% for the year despite the monthly decline, and the long-term AI trend is intact, but the unwinding of leveraged positions, particularly in South Korea where regulators announced measures to control leveraged ETFs, added to the volatility. With global oil reserves depleted after months of Strait of Hormuz disruptions, any further supply shock could amplify the market stress.