What happens if the AI chip trade cracks?

AI may be the word on everyone’s lips, but semiconductors are the technology underpinning it. Think names like Nvidia, AMD, Micron Technology, TSMC, the list goes on…

Semiconductor stocks rallied sharply in early 2026, before falling over the past week. The growth this year has been parabolic, which is increasing fears of a bubble.

Should investors fear a correction or does the semiconductor industry have more to run? If so, where should investors be looking to invest?

The Philadelphia Semiconductor Index (NASDAQ: SOX), which tracks 30 major US-traded semiconductor companies, had gained 59.57% since the start of 2026, even after falling more than 6% over the week to 18 May 2026.

Just as we discuss the heavy sway of the Magnificent Seven in the S&P 500, it can’t be ignored that 19 semiconductor stocks now account for 19% of the S&P 500, giving the sector an outsized influence over broader market returns.

There is an extraordinary amount of capital spending being directed towards the AI buildout, with chip spend a critical component. Following Nvidia’s Q1 earnings announcement overnight, investors may wonder whether it is time to take profits or increase exposure.

Driving the rally

Recent falls in semiconductor stocks have been linked to several concerns. These include renewed geopolitical risk, inflation concerns tied to the oil crisis and conflict in Iran, rare earth supply constraints, and weaker smartphone demand as consumer memory chip shortages push up costs.

However, the recent falls remain modest compared with the sector’s gains in 2026, let alone the more than 250% gains over the past five years.

To put that in perspective, the Nasdaq 100, hardly an underperformer in its own right, jumped around 116% in the same period.

The rally has drawn comparisons with the dotcom bubble, and many analysts have warned that not every company exposed to AI or semiconductors will emerge as a winner.

On the bear side, stands famous investor Michael Burry who has reportedly taken out January 2027 put options against the iShares Semiconductor ETF, expecting falls of around 30%. The Bank of England is concerned about an AI bubble which would also hit the semiconductor industry. Goldman Sachs CEO David Solomon also tipped a 10-20% market correction, though this was not limited to semiconductors.

More bullish are fund managers like Ark Invest’s Cathie Wood or BlackRock’s Larry Fink, while closer to home, Loftus Peak, Munro Capital, and Frazis Capital Partners have each benefited from investments in semiconductor players.

Gartner expects global semiconductor revenue to grow 64% in 2026 to over US$1.3 trillion, while Deloitte projects annual sales of US$2 trillion by 2036.

There is plenty of structural support for the ongoing success of the semiconductor industry.

Current drivers include significant capital expenditure towards AI innovation, for example Microsoft, Amazon, Alphabet and Meta intend to spend US$700bn on AI infrastructure which is pushing demand for semiconductors, while consumer memory shortages continue to push up chip prices.

Neuberger Berman Chief Investment Officer Shannon Saccocia recently argued that demand is broadening beyond chips used to train large language models. The shift towards agentic AI may require both general-purpose components and cutting-edge accelerators, helping to support further growth.

She outlined key areas to benefit from this shift included memory chips, CPUs and analog semiconductors (which help power devices in data centres).

“Is the semis surge sustainable? The fundamentals say yes. AI demand is real, adoption is accelerating and spending visibility extends well into 2027. The path will not be linear, but the direction of travel is clear,” Saccocia wrote.

Growth will not be universal

Applying the lessons of past technology booms – that some companies will thrive and others will go bust as part of the AI transition and growth in the semiconductor industry – McKinsey & Company expects three segments to dominate semiconductor demand in the coming years, much as they do today.

1. Computing and data storage, with data centres the largest driver of demand.
2. Wireless, including smartphones.
3. Automotive, particularly as advanced driver assistance systems and autonomous driving features require more semiconductor content.

McKinsey forecasts a 13% CAGR for the semiconductor market between 2024 and 2030, with leading-edge chips and memory expected to account for a large share of growth.

McKinsey noted that top-performing companies, those most likely to survive and thrive typically follow five key steps to optimise their profit:

• Programmatic M&A
• Dynamic resource reallocation
• Out-investing competitors
• Improving productivity
• Strong differentiation from competitors to ensure growing margins.

Taking this on board, larger companies such as Nvidia and TSMC may be better positioned to take advantage of the opportunities for the semiconductor industry compared to newer entrants – though this isn’t a guarantee of their survival and long-term success.

Managing exposure

Some investors with existing semiconductor exposure may be using the recent rally to take profits and rebalance towards higher-quality companies. That does not necessarily mean removing exposure, but rather resetting portfolios back to strategic allocations.

Others may be taking the opportunity to assess the quality of their exposure – if you think the sector could face a dotcom-style correction, even with the structural opportunities for continued growth, then this might be the opportunity to consider strength and positioning of underlying holdings. Which companies have durable competitive advantages? Which have the balance sheet strength to keep investing in innovation? And which are still moving faster than competitors?

Other investors without exposure may be wondering if they’ve missed the boat entirely and this really depends on your view of the opportunities going forward which suggests there’s still growth to come if you are selective.

Outside of the usual big names that investors seek for exposure, like Nvidia (NASDAQ: NVDA), TSMC (NYSE: TSM), SK Hynix (KRX: 000660), AMD (NASDAQ: AMD), Intel (NASDAQ: INTC), Texas Instruments (NASDAQ: TXN), Micron (NASDAQ: MU), Broadcom (NASDAQ: AVGO) and Qualcomm (NYSE: QCOM), investors can consider ETFs for thematic exposure or take broader fund exposures which incorporate semiconductor names.

The Global X Semiconductor ETF (ASX: SEMI) is the only Australian listed pure-play ETF for exposure.

Some relevant ASX-listed companies – typically on the small and micro end so may entail higher risk, include: 

• Archer Materials (ASX: AXE)
• BluGlass (ASX: BLG) 
• Brainchip Holdings (ASX: BRN)
• Silex Systems (ASX: SLX) 
• Weebit Nano (ASX: WBT)

(Note: these are listed in alphabetical order and are not recommendations.)

You could also consider more indirect exposure such as suppliers to the semiconductor industry or companies that utilise semiconductors.

Suppliers may include companies exposed to rare earths and critical minerals, such as Lynas Rare Earths (ASX: LYC), Iluka Resources (ASX: ILU) or diversified miners with relevant exposure.

Or an example of an industry that will utilise semiconductors is data centre developers and operators like Goodman Group (ASX: GMG) and NextDC (ASX: NXT).

Some broader ETF exposures which include semiconductor names (along with companies that use semiconductors as part of their activities) include:

• Betashares Nasdaq 100 ETF (ASX: NDQ)
• Global X FANG+ ETF (ASX: FANG) 
• ETFS Magnificent 7+ ETF (ASX: HUGE) 
• Global X Morningstar Global Technology ETF (ASX: TECH)

You can also find a range of actively managed funds which have semiconductor names in their portfolios.

Boom or bust?

The semiconductor cycle may not be over, given the sector’s structural demand drivers. However, investors should proceed with caution and keep investment fundamentals in mind when deciding whether, where and how to invest.

As with any sector, performance will not be determined by structural growth alone. Valuations, earnings, competition, capital spending, supply constraints and geopolitical risk will also matter. The trend for AI is one of the most significant drivers for demand, and activity on this front will continue to sway the semiconductor industry.

For investors, the key question may be less whether the semiconductor industry continues to grow, and more which companies are best positioned to benefit, and which may fall by the wayside.