A strategy team from JPMorgan has issued a warning that the risk of a severe market "shakeout" is rising as extreme volatility in semiconductor stocks forces some investors to reduce their allocations.

The team, led by strategist Nikolaos Panigirtzoglou, noted that while chip stocks rallied to record highs this week, volatility has simultaneously surged, potentially triggering a so-called Value-at-Risk (VaR) shock for investment portfolios.

In such a scenario, intense market swings can cause investors to breach their VaR limits, compelling them to cut positions—even if they remain fundamentally bullish on the trade's underlying thesis.

"The growing presence of VaR-sensitive investors has increased the market's sensitivity to a 'volatility-induced, self-reinforcing selling cycle'," Panigirtzoglou wrote in a report.

The VaR model estimates the maximum potential loss a portfolio could face over a given period. When actual volatility exceeds the model's assumptions, investors are forced to reduce exposure to stay within risk limits, creating a feedback loop: selling begets more volatility, which in turn triggers further selling.

The Philadelphia Semiconductor Index, which tracks the U.S. chip sector, plunged more than 10% earlier this month amid concerns about an overheated artificial intelligence (AI) trade. However, the index has since rebounded sharply, surpassing 14,000 points for the first time on June 15 to set a new all-time high.

Year-to-date, the index has soared roughly 90%.

The JPMorgan strategists cautioned that volatility tends to build gradually ahead of an impending VaR shock—a pattern that was evident before the sell-off in early June. Additionally, market liquidity typically dries up before such a shock occurs.

Concerns Over Crowded Trades and Lofty Valuations

Meanwhile, a global fund manager survey released by Bank of America this week showed that 80% of respondents view being long semiconductor stocks as the market's "most crowded trade," a record high for the survey.

The JPMorgan team also pointed out that excessive valuations present another challenge. Their analysis indicates that the weighting of semiconductor stocks in global indices is growing much faster than their corresponding share of total revenue.

Specifically, this ratio has reached six times, which is more than double the comparable level for the "Magnificent Seven" stocks within the S&P 500.

These factors could lead to a scenario where a sudden deleveraging in the semiconductor sector spills over into the broader technology sector and major stock indices, potentially reversing recent gains.