Last week witnessed a sharp sell-off in chip stocks, with the broader technology sector facing significant pressure, indicating a clear cooling of the market's fervor for artificial intelligence. The mounting pressure is palpable—investors are poised to hit the sell button, and major technology companies are under increasing pressure to justify their enormous AI expenditures in the upcoming earnings season.

The AI-driven rally that was pushing stock indices to record highs just a month ago has evidently come to a halt. The information technology sector was the worst performer in the S&P 500 last week, with the index falling 1.6% for the week, while the tech-heavy Nasdaq 100 Index plummeted 4.1%. Chip stocks were the primary driver of the decline, with the Philadelphia Semiconductor Index (SOX) plunging 10% last week, marking its largest weekly drop since April 2025.

Even Elon Musk's venture, SpaceX (SPCX.US), was not spared, falling another 15% last week after a 10% drop the previous week. Its stock price has fallen below its IPO price, erasing over $1 trillion in market value from its peak.

Jake Seltz, a portfolio manager at Allspring Global Investments, stated, "Investors are becoming uneasy with the massive spending, fearing a bubble is forming. Ultimately, we need to see a reacceleration of revenue growth."

As questions mount regarding the hundreds of billions of dollars being poured into data center construction, the upcoming earnings reports from major tech giants over the next two weeks will be scrutinized closely. Investors will be looking for evidence that these investments are generating higher returns.

Tesla (TSLA.US) and Alphabet Inc. (GOOGL.US) will kick off the large-cap tech earnings season on Wednesday, followed by Microsoft (MSFT.US), Meta Platforms Inc. (META.US), Apple (AAPL.US), and Amazon (AMZN.US) next week. These six stocks collectively account for a quarter of the S&P 500's market capitalization weighting. NVIDIA (NVDA.US) is scheduled to report its results at the end of next month.

The current situation is critical. An index tracking the "Magnificent Seven" tech stocks is underperforming the S&P 500 this year—a rare occurrence for a group that has led the market for most of the past four years.

Simultaneously, concerns over capital expenditure are severely impacting the semiconductor sector—the very group that benefits most from this spending and has been a major contributor to the S&P 500's 8.9% gain this year.

Market focus this week will largely be on Alphabet. The Google parent company is widely seen as an AI winner due to the popularity of its Gemini chatbot, its in-house data center chip development, and the expansion of its cloud computing business. However, growth in these areas comes at a high cost.

Alphabet's capital expenditure is projected to more than double this year to $187 billion. Like many of its peers, it is increasingly turning to debt and equity markets for financing, which is unsettling investors.

Reportedly, the delivery timeline for Alphabet's most powerful flagship AI model, Gemini 3.5 Pro, is months behind schedule. Influenced by this, the stock has fallen 6.5% over the past two trading sessions. Although it is still up 11% year-to-date, it has retreated 14% from its May high.

Market sentiment is more pessimistic for other large-cap tech stocks. Microsoft just experienced its worst monthly performance since 2000, down 19% year-to-date. Meta Platforms is down slightly for 2026, despite a July rebound fueled by optimism about its potential compute rental efforts. Amazon is up 7.1% year-to-date, and NVIDIA is up 8.8%, both underperforming the Nasdaq 100 Index.

Todd Ahlsten, Chief Investment Officer at Parnassus Investments, said, "At some point, earnings are questioned so much that you can no longer assign high price-to-earnings multiples to these stocks. The market will focus more on cloud gross margins, pricing, and how much AI revenue is generated per unit of compute."

Indeed, valuations for tech giants have broadly retreated. The Bloomberg Magnificent Seven Index currently trades at about 24 times expected earnings over the next 12 months, down from 33 times last October and 29 times at the start of the year. The Nasdaq 100 Index trades at a multiple of about 22 times.

Ahlsten noted that this has shifted risk to other areas that have seen massive gains this year, such as chipmakers. His firm manages approximately $45 billion in assets.

The Philadelphia Semiconductor Index (SOX) has surged dramatically this year as massive AI infrastructure spending flows to its constituents. This benchmark of 30 chip-related companies is up 65% so far in 2026, with only one constituent stock in negative territory.

However, since hitting a record high last month, the index has plunged 20%, reaching the threshold for a technical bear market, with volatility spiking sharply. Over the past four weeks, the index has had only two trading days without a move exceeding 2%.

Intensifying Market Volatility

Even positive signals from earnings reports have failed to halt the SOX index's decline. The world's largest chip foundry, Taiwan Semiconductor Manufacturing (TSM.US), and semiconductor equipment giant ASML (ASML.US) both raised their full-year revenue forecasts.

Meanwhile, IBM's (IBM.US) results showed customers are prioritizing spending on servers and semiconductors over mainframes and software.

"Given these issues, I would be more cautious in this period," Ahlsten said. "Some stocks, particularly in the infrastructure space, may look like they've peaked somewhat. They've gotten high P/E multiples for accelerating growth, but the ultimate growth may not be as fast as some imagine."

Of the top ten contributors to the S&P 500's gains this year, seven are chip-related companies. Micron (MU.US), NVIDIA, AMD (AMD.US), Intel (INTC.US), Applied Materials (AMAT.US), Lam Research (LRCX.US), and SanDisk (SNDK.US) together account for nearly half of the benchmark's gains.

But Wall Street seems to have begun questioning the sustainability of the rally in memory chip stocks—these stocks, propelled by supply shortages and soaring prices due to data center developer demand, are among the top S&P 500 gainers this year. As the best-performing stock in the benchmark for 2026, SanDisk plunged 29% last week, while the third-ranked Micron Technology fell 13%.

Apple is up 23% year-to-date, making it the best performer among the Magnificent Seven. Apple has avoided massive capital expenditure, instead powering its AI services through partnerships with model providers—a clear indicator of investor wariness towards massive AI spending.

Brock Campbell, Head of Research at BNY Investments Newton, stated, "The market is currently in a period of heightened anxiety, and hyperscale customers are not the darlings of this trade. The core debate is about the duration and scale of AI spending."

Alphabet, Microsoft, Amazon, and Meta have projected combined capital expenditure of up to $725 billion for this calendar year. According to the average analyst estimate compiled by the market, Wall Street expects this figure to climb to nearly $900 billion by 2027.

However, despite all the concerns over these massive outlays, Allspring's Seltz is betting that spending will continue to grow. He believes demand for cloud services will outstrip supply, supporting revenue growth for tech giants and subsequently driving AI infrastructure stocks higher.

"It's not uncommon for these stocks to sell off for weeks or months and then rally again," he said. "I would use any pullback as an opportunity to add. This cycle is not over. I think there are several more years of good returns, but volatility will spook the market from time to time."