Chip stocks' "Black Tuesday": A technical correction, or a turning point in the bull market?

Original title: "South Korea Ignites 'Black Tuesday': Has the Global Chip Stock Bull Market Been Dealt a 'Blow on the Head', or Is It Just a 'Technical Correction'?"

Original source: Wall Street CN

Behind this round of chip stock sell-offs is not an accident triggered by South Korean "market rumors," but an inevitable purge resulting from the extreme crowding and fragile leverage in the AI sector. Analysts at Goldman Sachs and others believe that the AI narrative has not shifted, and the sell-off is concentrated in crowded long positions, resembling more of a "technical correction." However, with rising expectations of interest rate hikes and 65% of companies in a buyback blackout period, multiple pressures are accumulating, and there is no clear boundary between a correction and medium-term risks.

On Tuesday, June 23rd, global chip stocks were caught off guard by South Korea. One Wall Street strategist dubbed the sell-off a "chip-wreck."

The first to crash was this year's "world's hottest stock market" – South Korea. The KOSPI index plunged 10% in a single day, triggering circuit breakers multiple times, with SK Hynix and Samsung Electronics each falling over 10%.

Several market rumors ignited the storm: South Korean media reported that Nvidia's Rubin anticipated production cuts, and SK Hynix was slowing the expansion of high-bandwidth memory (HBM4), shifting towards cheaper standard DRAM. Secondly, Yonhap News reported that lawmakers from multiple South Korean political parties are discussing taxing unrealized gains on assets like stocks and real estate – meaning taxes would be owed even on paper profits not yet sold.

This "chip earthquake" subsequently spread to the US stock market.

Overnight, the Philadelphia Semiconductor Index (SOX) fell 7.9%, with all 30 constituent stocks declining without exception. Micron Technology fell 13% – before Tuesday, it had surged over 300% this year, making it the strongest constituent of the SOX year-to-date. Micron, Nvidia, and AMD collectively accounted for approximately 50% of the S&P 500's decline. The Nasdaq closed down 3.3%, the Dow fell only 0.1%, and the S&P 500 dropped 1.4%.

Jonathan Krinsky, Chief Market Technical Analyst at BTIG LLC, stated: "Regardless of whether there is a short-term rebound, we still believe there is medium-term downside risk in the tech/AI sector." He estimates the semiconductor sector could fall another 10% to 15% and described Tuesday's trading as a "chip-wreck."

However, Peter Callahan, TMT specialist at Goldman Sachs Global Banking & Markets, wrote in a flash note on June 24th: "Today's investor conversations were mostly around 'what are you seeing', rather than signs of a broader narrative shift." This is a key point. It defines the boundary of this sell-off: The market looked terrible, but at least on that day, there were no signs of capital completely abandoning AI trades.

So, the issue is not as simple as "a single South Korean rumor crashes the global AI bull market." It looks more like a sector that had run up significantly, with crowded trades and considerable leverage, collectively de-risking after encountering a spark. In the short term, it indeed has the characteristics of a "technical correction"; in the medium term, the vulnerabilities of the AI trade have not disappeared.

This is a Contagion, Not an Accident

The crash in South Korea seems sudden, but the logic behind it is not complicated.

The news of a slowdown in SK Hynix's HBM4 expansion caused SK Hynix to crash. Its weight in the South Korean stock market is similar to Apple's weight in the Nasdaq – its size is so massive that when it falters, the entire index struggles to hold up. More critically, many South Korean retail investors use leveraged ETFs to participate in AI/semiconductor trades. When the market falls, these products are forced to sell to maintain their leverage ratios, creating mechanical selling pressure.

The news itself was the spark, but the leverage structure was the dynamite. Meanwhile, some market observers are asking: "Could leveraged South Korean retail investors be the terminator of the US tech bull market?"

This question is admittedly exaggerated, but it points to a real vulnerability: AI/semiconductor trades are highly concentrated, with global investors holding very similar positions. Selling at any node can propagate along this chain.

According to Goldman Sachs' post-market data, both longs and shorts were selling that day: Long-only (LO) funds showed a selling skew of -18%, while hedge funds (HF) were also selling consistently throughout the day, with shorts accounting for 60% of sales volume (compared to a recent average of about 50%). The nominal exposure sold by both types of institutions exceeded $1 billion each.

The worst-hit US stocks were the "crowded longs," the "best-performing stocks of the year": The Goldman Sachs memory stock basket (GSTMTMEM) fell 10%, the AI semiconductor basket (GSCBSMHX) fell 620 basis points, the AI stock basket (GSTMTAIP) fell 440 basis points, and the 12-month momentum stock basket (GSXHUHMOM) fell 420 basis points.

Technical Correction? Goldman Sachs: The Narrative Hasn't Shifted

With such a significant drop, what does the market actually think? If you only look at the decline, Tuesday looks like a repricing of AI trades. But based on trading volume and capital flows, the conclusion is not so absolute.

Goldman Sachs TMT trading desk specialist Peter Callahan wrote in his post-market flash note that Tuesday's feeling can be described as "orderly" – despite the significant decline, overall Nasdaq volume was roughly in line with the 20-day average, and cash and volatility trading desks functioned normally.

More importantly, he described the content of conversations with investors that day: "Today's investor conversations were largely themed around 'what's it like out there', without seeing signs of a broader narrative logic shift or incremental inquiry into 'new names' or 'laggard names'."

In other words, no one was rotating or looking for new investment directions. Everyone was just comparing notes.

Chris Hussey, another market strategist at Goldman Sachs, provided specific data support: Among the 12 tech stocks that fell over 8% on Tuesday, all but one are still up double digits year-to-date, with most having more than doubled this year. His assessment:

"Today's sell-off looks more like 'skimming the froth' off an exuberant price rally rather than a fundamental re-evaluation of the AI infrastructure trade. Investors aren't broadly exiting the index; they are re-evaluating: for stocks that have doubled in 6 months, what price is one willing to pay?"

Jack Janasiewicz, portfolio manager at Natixis Advisors, shares a similar view:

"This looks like more of a technical sell-off than anything else. Market breadth was okay at the open, despite many deep red numbers – a sign of a narrow sell-off." He also cautioned, "When you see such massive crowding in beta and momentum, it can easily lead to an ugly deleveraging event."

The Other Side of the "Technical Correction": Structural Concerns That Cannot Be Ignored

The term "technical correction" sounds reassuring, but it could explain everything while also masking real risks. The market action that day did have technical characteristics: the decline was concentrated in winning stocks, volume didn't spiral out of control, and investor conversations didn't immediately signal the end of the AI narrative. However, there is no clear wall between a technical correction and structural risk – the former, if violent enough, can easily morph into the latter.

Several background numbers are worth considering together.

First, the rally was too steep. The Nasdaq has risen over 30% since the end of March. Just in June, the Philadelphia Semiconductor Index experienced 8 trading days (out of 16) with single-day swings exceeding ±5% – meaning half of the trading days in June saw violent fluctuations in chip stocks. Even after Tuesday's drop, the SOX is still up about 5% for the month, outperforming the Nasdaq and S&P 500 by roughly 8 percentage points. A pullback at these levels is justifiable as a technical correction, yet it also highlights the fragility of being at such elevated heights.

Second, positions are too crowded, and a key 'support' is temporarily absent. Julian Emmanuel, Chief Equity and Quantitative Strategist at Evercore ISI, told Bloomberg TV: "People are looking for reasons to hedge, yet they still want to stay invested." This accurately describes the current conflicted market sentiment. Simultaneously, 65% of publicly listed companies are currently in their earnings-related buyback blackout periods. In past downturns, corporate buybacks were a crucial source of support, but that card cannot be played now.

Third, the macroeconomic backdrop is shifting. Expectations for Fed rate hikes are rapidly heating up – Bank of America expects three more rate hikes within the year, and the market's pricing for a July hike has surged from near zero to about 50%. The valuation logic for high-growth tech stocks relies on low discount rates. If rates rise, the present value of future earnings naturally shrinks, and stocks relying on high expectations for their valuations are hit first.

Michael O'Rourke, Chief Market Strategist at JonesTrading Institutional Services, wrote: "The hyperscale cloud computing companies are the new software stocks. This sector is dragging down the 'Magnificent Seven' while failing to find its own footing."

Torsten Slok, Chief Economist at Apollo, outlined three core questions facing the market: What happens if AI companies start cutting their computing budgets due to insufficient ROI? What are the implications for stock and credit markets if the Fed raises rates in September and December? These questions have no simple answers, but the market is shifting from being 'willing to overlook these risks' to starting to take them seriously.

The reason this technical correction warrants serious attention is not the size of the decline itself, but because it occurs when valuations, positioning, interest rates, and sentiment are all at extreme levels.

Historically, South Korean Crashes Have Been Short-Lived – The Next Stress Test is Micron

Historical data shows that sharp sell-offs in the South Korean stock market are often violent but brief. This is a "silver lining" that bulls are keen to cite.

However, the current context differs from past, purely domestic South Korean events: it touches the core nerve of the global AI trade – is memory chip demand truly as strong as anticipated? Has the frenzy for data center construction already mortgaged the future?

These questions will be partially answered with Micron's earnings report released on Wednesday. Micron was the strongest component of the SOX this year, rising over 300% before Tuesday. Its earnings report will be a genuine stress test.

Perhaps BTIG's Krinsky put it most directly: "Whether there is a short-term rebound or not, the medium-term downside risk for semiconductors remains."

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