Applied Materials Faces Sector Selloff Amid AI Chip Valuation Concerns

What happened

The PHLX chip index dropped 4.65% in a broad semiconductor sector selloff. Memory chip manufacturers led declines, with Micron falling 4.7% and Sandisk losing 7.3%. The selloff occurred despite Samsung Electronics reporting strong quarterly earnings, which failed to meet investor expectations that had climbed significantly during the sector's recent rally. Additionally, Reuters reported that Chinese AI startup DeepSeek is developing its own AI chip, which could reduce dependence on established chip suppliers like Nvidia and Huawei. The Nasdaq composite fell 1.16% overall, with eight of eleven S&P 500 sector indexes declining.

Why it matters

Applied Materials, as a major semiconductor equipment supplier, is directly exposed to demand cycles in chip manufacturing. When memory chipmakers and other semiconductor companies face valuation pressure, it often signals concerns about future capital expenditure on manufacturing equipment-a key revenue driver for Applied Materials. The market's skepticism about whether companies can meet increasingly difficult expectations suggests potential headwinds for equipment orders. The DeepSeek development also highlights ongoing efforts by Chinese companies to build domestic chip capabilities, which could reshape the competitive landscape and supply chain dynamics in the semiconductor equipment industry.

Bigger picture

The semiconductor sector has posted exceptional gains in 2026, with the chip index up approximately 74% year-to-date before this selloff. This rally has been driven largely by expectations around AI data centre buildout and the infrastructure required to support artificial intelligence workloads. However, the sharp reaction to Samsung's otherwise strong results suggests investors are becoming more cautious about valuations after this extended run. The sector is experiencing what analysts describe as *rotation*-a shift in investor positioning after prolonged gains. With SK Hynix's U.S. listing debut approaching, the market will get another test of appetite for semiconductor stocks at current valuation levels.

What to watch

The Federal Reserve minutes release will provide insight into monetary policy direction under new Chair Kevin Warsh, which could influence capital-intensive sectors like semiconductors. SK Hynix's Nasdaq listing debut on Friday will serve as an important gauge of investor demand for chip stocks at current valuations. Broader indicators to monitor include memory chip pricing trends, AI data centre capital expenditure announcements from major tech companies, and further developments in DeepSeek's chip development efforts. Any guidance from semiconductor companies about future equipment spending will be particularly relevant for Applied Materials.