Semiconductor Stocks Slide as Chip Earnings Growth Tops 130%

Strong profits, falling prices

Chipmakers are reporting their best profits in years while their stocks keep falling. Analysts expect semiconductor earnings to grow about 136% year over year in the third quarter. The S&P 500 as a whole is expected to grow earnings 30.6%.20 Yet the Philadelphia Semiconductor Index (SOX) fell 4.30% in the week ending October 9. Over the same week, the equal-weight S&P 500 rose 1.58%, ending a run of seven straight down weeks.6 Technology was the worst sector in the index that week.6

This has been going on since summer. The iShares Semiconductor ETF (SOXX) lost 21.2% in July, its worst month since December 2002, while the S&P 500 ended the month flat.25 A Seeking Alpha piece in August called semiconductors the sector with the best earnings in the S&P and the worst chart. Its author said hyperscaler capex looked largely intact but the charts did not look bullish, and he was raising cash.21 Two months later, that description still fits.

The main point is this: the selloff is not coming from falling earnings. Investors are paying less for each dollar of chip profit. They worry about how the AI buildout is being paid for, about interest rates, and about how much of the market's earnings growth now depends on a handful of companies.

Last week: one OpenAI report

The sharpest drop came on Thursday, October 8. The Financial Times reported that OpenAI's annualized revenue was about $20 billion lower than previously estimated. The SOX closed down 3.39% at 12,623.72.5 Nvidia fell 2.94%, AMD 3.9%, Intel 5.34% and Micron 4.8%. TSMC's U.S.-listed shares lost 3.01%.5

The rest of the market held up. The S&P 500 lost only 0.47% and the equal-weight version gained 0.60%. A memory-chip gauge fell 5.13%.8 About 66% of S&P 500 stocks rose that day, and energy led as oil prices climbed.5

Reporting differs on how much weight the OpenAI figure deserves. Some coverage says part of the gap reflects differences in how OpenAI and Anthropic count revenue.5 One commentator argued that accounting methods, not confirmed weaker demand, explain much of the discrepancy.14 An options desk said nothing in the economic data that day justified the move, noting that jobless claims fell to 197,000.8 The tone eased by Friday. Even so, the SOX fell another 0.4% while nine of 11 sectors rose.3

Other pressures added to the OpenAI news. A Wall Street Journal report said Broadcom was arranging $50 billion in financing for OpenAI, and Oracle was reported to be in financing talks of its own. Investors worried about tech companies competing for the same debt markets. Broadcom fell 4.35%.5 Fed Governor Christopher Waller also said more rate hikes would likely be needed, while rising oil prices revived inflation fears.5 The day before, a jump in the 10-year Treasury yield back above 5.3% had already hit chip names such as Microchip, Teradyne and NXP.18

How strong are the earnings?

The earnings side holds up across the coverage, though the exact figures differ. FactSet data cited by Ed Yardeni put expected second-quarter semiconductor and equipment earnings growth at 131%, against 23.6% for the S&P 500.25 VanEck also uses 131% for the second quarter.17 Another tally puts second-quarter growth nearer 158% and the third-quarter estimate at 136%.20 The definitions and dates behind these numbers vary. Either way, the sector's profits are growing several times faster than the market's, though the growth rate may be peaking.

Company results support this. TSMC's September revenue rose 54.6% from a year earlier, and nine-month revenue was up 41.1%.20 Samsung guided to third-quarter operating profit of about 107.4 trillion won.20 Its shares still fell 2.4% in Seoul because the record forecast missed even higher expectations.5 Broadcom's latest quarterly revenue rose 85.5% to $29.6 billion, and its AI chip revenue jumped 221%.16 AMD's second-quarter revenue was $11.5 billion, with data center sales making up 58% of the total.16 Applied Materials beat estimates with $9.12 billion in revenue, yet its stock is down 26% over 90 days.16

These earnings are also concentrated. Goldman Sachs estimates that Micron and Nvidia alone account for 34% of expected third-quarter S&P 500 earnings growth. AI infrastructure companies as a group account for 54%.14 That means the market's earnings growth rests heavily on the same stocks investors are now selling.

Why prices lag: competing explanations

Analysts largely agree that valuations, not earnings, have fallen. They disagree about why.

Funding and cash flow. VanEck's view is that the market sold off because the AI buildout sped up. Spending is growing faster than operating cash flow, which pushes hyperscalers' free cash flow negative in 2026 and 2027.17 It puts 2026 capex for the five largest U.S. spenders at $844 billion, up 81%.17 The August Seeking Alpha piece raised a related worry: Reuters and LSEG data put AI and Big Tech bond issuance above $220 billion by mid-August, about double all of 2025.21 The Broadcom and Oracle financing reports fit this pattern.5

Interest rates. Higher yields reduce what investors will pay today for future earnings, and long-duration growth stocks feel it most. The August piece argued that a roughly 5% SOX drop on August 18, when the 30-year Treasury yield traded near 5.33%, was not about demand.21 The October 7 selloff was tied to yields directly.18

Forced selling. Yardeni linked part of July's drop to Leopold Aschenbrenner's Situational Awareness fund. The fund reportedly ran about four times leverage and got margin calls from three prime brokers before Citadel bought its public holdings.25 In this account, the selling was mechanical. Once it cleared, Micron rose 18% and SanDisk 26% in one session.29

These explanations do not exclude each other. The funding argument best explains why the weakness has lasted. Forced selling explains how sharp July was. Rate spikes explain some of the worst single days.

Cheap or still expensive?

In early August, Yardeni put the S&P 500 semiconductor industry at a forward P/E of 15.9, a large discount to the market, and said none of the selling reflected a weaker outlook.25 Not everyone agrees the sector is cheap. A screen on October 8 found memory stocks inexpensive, with Micron at about 6x forward earnings. AMD (82x), Intel (79.8x) and Arm (136.5x) remained pricey after the drop.11 The same screen warned that very low memory multiples may reflect expectations that earnings are at a cyclical peak.11

The sector-wide discount Yardeni describes is real, but it is uneven. Equipment and memory stocks have been marked down sharply. Some of the most popular AI design stocks still trade at high multiples.

Earnings season is the test

Wall Street is starting to lean toward buying. Goldman Sachs noted that the SOX fell 11% over two months while the S&P 500 gained 4%. It said the setup was a stark contrast to the second quarter and expects estimates to rise in equipment, compute and storage.9 It named Applied Materials, Seagate and Microchip as tactical buys and flagged Qualcomm, KLA and Western Digital for downside risk.9 Citi forecasts AI capex growth of about 106% in 2026 and 56% in 2027. It argues that strong demand alone may no longer lift chip stocks, and that profit margins and cash generation will separate winners from losers.10

TSMC reports on October 15.12 It will be the first major read on chip demand since the OpenAI selloff.6 Our view is that strong numbers alone will not be enough. Over the summer, beats rarely lifted stocks; TSMC itself fell more than 3% after a strong quarter.17 Chip stocks are more likely to recover if management comments make investors more confident that customers can pay for this spending. That is what drove the gap between earnings and prices, and earnings growth alone has not closed it.