Could US Semiconductor Stocks Fall Another 20%? Analysts Divided on Market Outlook

Recently, artificial intelligence (AI)-related stocks have experienced significant volatility due to fund rotation and geopolitical risks, with semiconductor stocks leading the decline. Analysts are divided on the market outlook: one camp believes the long-term bullish trend in US equities remains intact and a short-term rebound is possible; the other warns that technical indicators for AI and semiconductor sectors have weakened, suggesting further market correction risks.

According to Business Insider, ongoing uncertainty surrounding Iran and continued rotation in AI trading have caused sharp volatility in US stock markets. This rotation has hit chip stocks hard—previously strong performers—and accelerated capital flows into other market sectors.

Meanwhile, investors are closely watching concerning technical signals emerging in the market. For example, the S&P 500 index recently fell below its 50-day moving average.

The 50-day moving average is a key support level, and the S&P 500's drop below it has led some professionals to believe further downside may be possible.

Currently, the S&P 500 is less than 1% below its 50-day moving average. Additionally, the Nasdaq 100 index, which recently reclaimed its 50-day moving average, is also trading less than 1% above that level.

This downturn has primarily hit chip stocks. After strong gains in the first half of the year, the semiconductor sector is now hovering near the edge of a technical bear market. The iShares Semiconductor ETF (SOXX-US), which tracks major chip stocks, has fallen 18% from its late-June peak.

Based on current technical signals, here is what technical analysts are saying about potential market developments.

S&P 500 Finds Technical Support

Some analysts believe large-cap stocks may be preparing to resume their upward trajectory after a brief loss of momentum.

Senior analyst Adam Kobeissi said on Monday (20th) that although the S&P 500 briefly broke below the key technical support level of 7,530 points last week, buyers stepped in to push the index back above 7,500 points, indicating that the long-term uptrend remains intact.

A key momentum indicator, the S&P 500’s daily Relative Strength Index (RSI), has recently risen back above 50—a level historically associated with bullish signals in the stock market.

Kobeissi noted that the index’s Bollinger Bands (a technical indicator showing overbought or oversold conditions) currently have upper and lower bands at 7,615 and 7,345 points, respectively, suggesting that the “overall upward trend remains intact.”

He added: “With earnings season momentum strengthening and risk appetite remaining robust, we expect the index to rebound toward 7,600 points this week. Therefore, we remain bullish on the S&P 500, with a target of 7,700 points and a stop-loss at 7,200 points.”

Long-Term Uptrend Still Intact

Mark Newton, Head of Technical Strategy at Fundstrat, also stated that both the S&P 500 and the Dow Jones Industrial Average remain within technical ranges indicating that the “long-term upward trend has not been broken.”

Newton pointed out that the Dow Jones Transportation Average recently closed near its all-time high. This index, which includes transportation and logistics companies, is often seen as a leading indicator of economic health.

Regarding the recent sell-off in chip stocks, he said: “It’s hard to interpret last week’s movement as anything other than simple fund rotation.”

Newton added that he is watching the 7,421 level on the S&P 500, calling it a “key make-or-break level.” If the index holds above this level, it could signal that the broader market environment remains bullish.

He said: “Until these levels are breached and the equal-weighted S&P 500 shows a weakening trend, I still believe the tech sell-off can be absorbed by the broader market.”

Short-Term Rebound Possible, But Selling Pressure May Continue

Investment firm Piper Sandler stated in a client report that while the stock market may see a modest rebound after last week’s drop, semiconductor and AI-related stocks still face continued downside risks.

The analyst team led by Craig Johnson noted that the VanEck Vectors Semiconductor ETF (SMH-US) is currently 18% below its 50-day moving average and at its lowest level in nearly eight weeks.

Analysts said they are watching for a potential break below the 200-day moving average for this ETF. If that occurs, it could signal another 20% decline for the semiconductor sector.

The firm said: “Semiconductor and AI trades are facing a reality check. Recent technical breakdowns suggest the market could correct further toward its 200-day moving average. While a short-term technical rebound is possible, the medium-term trend has already been broken.”

Tech Stocks Show Anomalous Volatility Pattern

Bespoke Investment Group, a market research and wealth management firm, pointed out that the Nasdaq 100 has recently displayed a notable market pattern: despite trading within a relatively narrow range, volatility has significantly increased.

Over the past 50 trading days, the Nasdaq 100 has seen daily moves of at least 1% on more than 20 occasions. Yet, the overall trading range remains limited, with less than a 10% difference between its high and low points.

Paul Hickey, co-founder of Bespoke, said in a client report that historical data since 1971 shows that after such patterns, the median 6-month return for the Nasdaq 100 has been negative. Additionally, its 12-month performance has historically been slightly below average.

Hickey said: “Based on these results, the short-term market outlook is not optimistic.”