Chip Stocks Slide Despite 131% Earnings Surge as Oil Tops $105

Strong earnings, weaker stock prices

Chipmakers are earning more money than they ever have, yet their share prices keep falling. VanEck reports that semiconductor industry earnings rose 131% in the second quarter of 2026, while its flagship VanEck Semiconductor ETF (SMH) dropped 23% over the same stretch.3 The fund manager points out that this was the fourth-deepest of seven semiconductor drawdowns since 2011. In 2022, prices fell because demand and earnings fell. This time earnings more than doubled, and the decline came from investors paying a lower multiple for those earnings.2

That was September's story. In mid-October it hit trading screens directly. A string of separate shocks landed within about a week: a disappointing revenue figure from OpenAI, a reported memory-chip advance from China's CXMT, a hotter-than-expected U.S. inflation report, and Brent crude holding above $105 on Middle East supply attacks. Taken together, they turned a gradual de-rating into a sharp selloff. My reading is that investors no longer doubt that AI demand is real. They doubt what that demand is worth when money is expensive, competition is growing, and energy shocks keep pushing up inflation.

The numbers don't fully agree

The size of the earnings boom depends on who is counting. VanEck puts Q2 semiconductor earnings growth at 131%.3 LSEG data cited by Reuters puts it closer to 158%, and expects about 136% in the third quarter, compared with roughly 31% for the S&P 500.7 Either way, growth is still enormous but is slowing from its peak. That matters, because markets tend to price the direction of growth more than its level.

The "23% drop" also needs some context. VanEck's own standardized table shows SMH up about 82% for the year through June 30.3 So the 23% figure is best read as a peak-to-trough fall within a hugely profitable run, not a loss for the quarter as a whole. Other measures of the pullback differ in size but agree on direction. Bernstein counted a roughly 15% fall in the SOX index from its June peak, even as forward earnings estimates for the year were revised up 113%.10 The New York Times put the index about 17% below that peak as of October 13.11

VanEck's explanation of the de-rating points to cash flow. Hyperscaler capital spending grew faster than operating cash flow, which pushed near-term free cash flow negative and squeezed valuation multiples, even though chip earnings doubled.2 In other words, the customers paying for the boom are spending beyond what their businesses currently generate, and investors have started to discount that.

A week of AI-specific shocks

The first shock came on October 8, when the Financial Times reported that OpenAI's annualized revenue run rate was close to $50 billion. The market had been assuming about $70 billion.17 The Philadelphia Semiconductor Index fell about 3.4% that day. Intel lost 5.3%, Micron nearly 4.8% and Broadcom 4.3%.17 On the same day, Broadcom CEO Hock Tan compared speculation in the AI sector to "casino gambling," which did nothing to calm nerves.14 By October 13, the iShares Semiconductor ETF had fallen five sessions in a row, its longest losing streak since May 2025.14

The next blow came from China. Chinese media reported that CXMT had made a chip-design breakthrough that would let memory chips hold more data without getting bigger. South Korea's KOSPI fell 5.5% on October 13, dragged down by Samsung Electronics and SK Hynix.11 The selloff spread across Asia and Europe: TSMC fell 2%, SoftBank more than 8%, and ASML about 4%.11 SK Hynix had already fallen seven sessions in a row, losing roughly 20% over that stretch.14 The selling did not stop. On October 15, the KOSPI dropped more than 8% intraday and triggered a market-wide circuit breaker, its fifth of the year.20

This CXMT move deserves more attention than it may get in the U.S. Memory has been the strongest earnings driver in the sector. Bernstein found that memory sales rose 452% year over year in July, compared with 35% for everything else.10 A credible Chinese competitor threatens pricing in exactly that part of the market. That helps explain why Korean memory makers fell hardest.

Inflation and oil join in

On October 14, the macro backdrop got worse. September consumer prices rose 3.7% year over year, above forecasts. More worrying, core inflation rose to 2.6% from 2.4%, so the surprise was not just about oil.29 The S&P 500 fell 1.11% and the Nasdaq 1.88%, the worst day for both since July. The semiconductor benchmark lost 4.3% and ended roughly 12% lower over the week.12 The "picks and shovels" of the AI buildout fell hardest: Marvell lost 8.7%, Oracle 8.8% and Dell 11.3%. CoreWeave dropped 15.5% amid worries about its rising bond yields.12

Rate expectations changed quickly. A day before the CPI release, traders put an 80% chance on the Fed holding rates steady in October, and investors had dropped bets on a hike that month. After the report, some analysts said an October hike was a real possibility again.29 Higher rates hurt the AI trade in two ways. They make the debt-funded data-center buildout more expensive, and they lower the present value of profits expected years from now.12 Broadcom's Hock Tan and Intel's Lip-Bu Tan both pointed to access to capital and financing costs as possible limits on the buildout, while saying near-term demand was still strong.17

Oil is what connects geopolitics to all of this. Brent was near $106 on October 13 as the Middle East conflict widened. A Saxo strategist said geopolitics matters most to markets when it feeds into inflation.21 During the week, Houthi forces hit a building at Saudi Aramco's headquarters, and ships in the Strait of Hormuz came under repeated attack.29 An earlier strike on Riyadh's King Khalid International Airport killed 12 people.27 Ship-tracking firm Kpler said seven-day average flows through Hormuz fell to 11.62 million barrels per day through October 13, about 68% of the normal 17.15 million.23

Attempts to ease the pressure have not worked so far. The IEA agreed to release more than 20 million barrels of diesel along with the rest of its March emergency reserve release, but prices rose anyway. One Chinese brokerage read that as a sign investors were dissatisfied with these measures.23 Washington is considering lifting sanctions on some "shadow fleet" tankers to bring down record freight rates.25 By Friday, October 16, Brent had eased to about $105 and WTI to about $97. Both were still on track for weekly gains, with WTI up nearly 6%.22 ING analysts said that removing the risk premium entirely would take some kind of agreement between the U.S. and Iran.26

TSMC's results didn't change the mood

If fundamentals alone set prices, TSMC's results would have ended the selloff. The foundry reported third-quarter net profit of NT$763.06 billion, up 69%. Revenue of $46.72 billion came in nearly $1 billion above the top of its own guidance, and it was the sixth straight record quarter.20 CEO C.C. Wei said the company did not see any sign of slowdown. TSMC also raised its 2026 revenue growth forecast to about 44% in dollar terms.16 Reports disagree on capital spending: one outlet cites guidance of $60–64 billion16, while another describes guidance of about $56 billion20. Both, however, show TSMC still investing to meet demand. Wei did add a note of caution. He said the company is being prudent in planning for 2027 because of rising component prices and macroeconomic uncertainty.16

TSMC's Taipei shares fell 2% before the results came out, as the Taiex dropped 3.41%.16 That reaction shows where the market stands. Reports confirming demand are no longer enough to lift prices when the worries are about financing costs, competition and inflation rather than orders.

Positioning and what to watch

The trade has also become less crowded. Bank of America's October fund manager survey found long semiconductors was still the most popular trade, but only 45% of managers named it, down from 82% in July.8 Semiconductors now make up about 15% of U.S. market capitalization, up from about 4% in 2023.4 Swings in chip stocks therefore move the broader indexes much more than they used to.

The bull case still has real support. The SOX remains up more than 70% for the year, and Goldman's capex forecasts still show spending rising.14 Samsung's preliminary forecast of 107.4 trillion won in third-quarter operating profit shows that memory pricing is still very strong.7 The next tests are Lam Research's results on October 2113 and hyperscaler capex guidance. Hyperscaler spending matters most, because it decides whether the free-cash-flow worries that started the de-rating ease or get worse.

My reading is that semiconductor earnings are not the weak point. Chipmakers' profits are still growing much faster than the broader market's. What has changed is that oil is keeping inflation high, Fed policy is less certain, and China has a credible memory competitor. Until Hormuz flows recover or rate expectations settle, chip stocks are likely to keep trading below what their earnings alone would suggest.