Chip, storage shares dropped on Thursday. SOXL down over 11%; SanDisk, Seagate Tech down around 8%; SMCI, Western Digital down 7%; SK Hynix down 6%; Intel, AMD, Micron down over 5%.

Flaring inflation concerns are threatening to unravel the core of the artificial-intelligence trade. Investors are grappling with the possibility that the copious investment dollars poured into chips and hardware could dry up.

Shares of the iShares Semiconductor ETF fell over 4% on Wednesday, with specialized chip names like Credo (CRDO) down 10% and Marvell Technology (MRVL) down 9%. After hitting a fresh all-time high earlier in October, the Nasdaq Composite Index fell 1.9% on Wednesday. Meanwhile the S&P 500 SPX dipped 1.1% and the Dow Jones Industrial Average DJIA slipped 0.1%.

With inflation rising faster than expected in September, investors are now bracing for the possibility of more interest-rate hikes. A high-rate environment would create difficult conditions for the capital-intensive AI boom, which has become increasingly dependent on borrowed money.

Shares of neoclouds, or the companies providing AI infrastructure as a service, were also hit hard. CoreWeave (CRWV) shares fell 15% on Wednesday, Nebius (NBIS) shares dropped 10% and IREN (IREN) shares closed down 12%.

These companies rely on debt funding to finance their expansion and purchase AI servers, leaving their business models vulnerable to rising interest rates. Yields on CoreWeave's bonds approached 15% on Wednesday, a level that pushes borrowing costs into distressed territory and drew a "yikes" from Elon Musk on X.

According to a Wednesday note from Jefferies trading-desk analyst Jeffrey Favuzza, single-day trading in CoreWeave put options hit an all-time high - meaning that traders are buying contracts that pay off if the stock falls further.

Investors may be rotating out of semiconductors into megacap tech names, Favuzza wrote in a Wednesday note. The Roundhill Magnificent Seven ETF MAGS - which tracks the equal-weight performance of Nvidia (NVDA), Meta (META), Alphabet (GOOGL) (GOOG), Microsoft (MSFT), Amazon.com (AMZN), Apple (AAPL) and Tesla (TSLA) - has outperformed the SOXX for the past eight days, a sign that investors are viewing Big Tech as a safety trade.

Apple stood out as the single "Magnificent Seven" name in the green on Wednesday. In fact, shares of the iPhone maker reached a record high, rising 0.5% and leading the company to close above a $5 trillion market capitalization for the first time, according to Dow Jones Market Data. The company has avoided spending hundreds of billions on an AI infrastructure buildout, a move that has given Apple shares safe-haven status among investors looking to escape the volatility in the tech landscape.

Wednesday's selloff will not be the last for AI names, according to Yorkville Ives & Co. analyst Dan Ives. "More gut-check moments will come as yields and headlines ebb and flow through year end," Ives wrote in a note.

But Ives sees the selloff as a buying opportunity. While higher yields will raise the cost of financing for AI projects, that doesn't change the fact that demand for processing power far exceeds supply, Ives said. He doesn't expect Big Tech companies to pull back on their AI spending plans anytime soon.