The popular Wall Street trade of 2026 — buying chip stocks and selling software stocks — is losing momentum. Software stocks are recovering after months of decline, while semiconductor stocks face pressure amid growing doubts about the sustainability of the artificial intelligence boom.
The software index rose 2.2 percent this month, while the Philadelphia Semiconductor Index fell 12 percent in July, though it remains up 78 percent since the start of the year. Financial institutions are shifting their views. Guggenheim upgraded several software companies, saying concerns about AI destroying the software industry were "exaggerated." HSBC also raised Adobe to "buy," arguing the market overestimated AI's negative impact on the company.
Meanwhile, reports about China's DeepSeek developing custom chips, Meta's plan to sell excess data center processing capacity, and Michael Burry's short positions on Nvidia and semiconductor ETFs have heightened concerns about high valuations in chip stocks.
Analysts warn that the market has moved too far in favor of chips and against software. They note that software companies are not being destroyed, while chip makers are not an unlimited opportunity. Concerns also linger that Meta's sale of processing capacity could signal actual AI infrastructure demand is lower than the capacity being built, potentially questioning future investments.