Applied Materials Caught in Broad Semiconductor Sector Selloff

What happened

The semiconductor sector faced a broad selloff in mid-July 2026, with the Philadelphia SE Semiconductor Index declining 11% for the week, marking its largest weekly drop since March 2025. The index fell 24% from its late June all-time high, entering bear market territory. Applied Materials dropped 4.8% on Friday as part of this sector-wide retreat. Other major chipmakers were similarly affected: Nvidia fell 3%, Advanced Micro Devices declined 3.2%, while Qualcomm and Broadcom each lost about 2%. Memory chip makers Micron and SanDisk also fell around 3% each. The selloff extended globally, with South Korea's KOSPI confirming a bear market and Japan's Nikkei entering correction territory. Despite the sharp decline, the semiconductor index remained up 62% year-to-date.

Why it matters

As a leading semiconductor equipment manufacturer, Applied Materials is directly exposed to capital spending cycles in chip manufacturing. The market pullback reflects investor concerns about the sustainability of AI-driven capital expenditures, which are critical to Applied Materials' business outlook. According to Toni Meadows of BRI Wealth Management, semiconductor valuations had priced in near-perfect demand for what has historically been a cyclical sector, leaving stocks vulnerable after their rapid rise. Two specific developments intensified scrutiny: Chinese AI startup Moonshot unveiled Kimi K3, a 2.8 trillion-parameter model described as the world's largest open-weight AI system, raising questions about competitive dynamics and return timelines on U.S. tech companies' AI investments. Additionally, reports indicated Google's Gemini 3.5 Pro flagship AI model was months behind schedule, suggesting potential execution challenges in the AI space that could affect future equipment demand.

Bigger picture

The semiconductor selloff occurred within a broader market rotation away from 2026's biggest winners. The S&P 500 Momentum Index, which had outperformed the benchmark S&P 500 by more than two-to-one in 2026, pulled back 10% in July compared to just 0.8% for the broader market. Some analysts noted concerns about overleveraged positions, with evidence of increased retail margin, growing assets in leveraged ETFs, and higher volume in short-dated options. The Direxion Daily Semiconductor Bull 3X ETF had plunged 57% from its late-June peak, though it remained up over 200% year-to-date. Large hedge funds had recently reduced exposure to top AI infrastructure players. Interestingly, even strong forecasts from Taiwan's TSMC and European equipment maker ASML failed to stem the decline, suggesting the selloff was driven more by valuation concerns and profit-taking than by fundamental deterioration in semiconductor demand.

What to watch

Investors should monitor upcoming earnings reports from major technology companies for insights into AI capital spending plans. Alphabet and Tesla are scheduled to report quarterly earnings the following week, along with semiconductor company Intel. These reports may provide clarity on whether AI infrastructure investments will continue at their current pace or moderate. Additionally, watch for any updates on competitive developments in AI technology, particularly progress on large language models from both U.S. and international players, as these could influence perceptions of AI capital expenditure returns. The sustainability of semiconductor equipment demand will depend heavily on whether hyperscale cloud providers and other major chip buyers maintain their aggressive investment timelines despite questions about near-term monetization of AI capabilities.