A sharp downturn has hit U.S. semiconductor stocks, significantly shaking the market's previously optimistic outlook for artificial intelligence demand.

The Philadelphia Semiconductor Index closed down 10% on Friday, marking its largest single-day drop since March 2020 and wiping over $1 trillion from the sector's total market capitalization.

The Friday selloff intensified losses from Thursday, which were triggered after Broadcom reported quarterly results showing that demand for its custom AI chips fell short of extremely high expectations.

Stronger-than-expected employment data fueled concerns about the duration of high interest rates, further dampening overall risk sentiment and contributing to a 2.3% decline in the S&P 500 index for the day.

Analysts note that as richly valued tech stocks face pressure, the market's tolerance for pricing high-value tech assets is being tested, coinciding with Elon Musk's SpaceX preparing for a massive IPO next week at a $1.75 trillion valuation.

Major Players Plummet, NVIDIA Sheds Over $300 Billion

The selling pressure impacted nearly all leading AI-related chip companies. NVIDIA, the world's most valuable chipmaker, fell approximately 6%, losing over $300 billion in market value in a single session.

Memory chip giant Micron Technology tumbled 11%, erasing roughly $127 billion in value. Recently favored Marvell Technology retreated 12%, while Advanced Micro Devices (AMD) declined 10.5%.

Broadcom, one of the biggest beneficiaries of the AI investment boom, fell another 7.5% on Friday, extending its two-day loss to 19%.

Trader Declares End of 'Mindless' Buying Strategy

The immediate catalyst for the decline was Broadcom's quarterly report. The company's disclosure that growth in its custom AI chip business did not meet the market's lofty benchmarks prompted a reassessment of the entire AI chip sector's prospects, sparking the initial wave of selling on Thursday before the downturn spread further on Friday.

The steep drop indicates investor confidence in high-growth tech stocks with elevated valuations is wavering. Even after this week's significant pullback, the Philadelphia Semiconductor Index remains up 75% for the year.

The shift in market sentiment is also evident in trading activity. Dennis Dick, a proprietary trader at Triple D Trading, commented:

"There was a lot of money that was just buying the dip mindlessly, and that strategy was working for so long, but it didn't work today."

The combination of expectations for sustained high interest rates and uncertainty around AI demand is putting simultaneous pressure on the two core narratives that previously drove chip stocks higher. Investors now face pressure to reassess the risk premium for technology stocks, with market sensitivity to the pricing of expensive tech assets rising notably around the timing of SpaceX's upcoming IPO, which is targeting a staggering $1.75 trillion valuation.