AI narrative changes! Signs of crowded trading in US stocks "buying chips, selling software" are now disintegrating.

The most popular technology trading strategy in the US stock market in 2026 - buying chip stocks and selling software stocks is showing signs of unraveling. In the past few months, the market has been worried that artificial intelligence (AI) will erode the growth space of software companies, leading to continued selling of software stocks. Now, this sector is finally seeing a rebound. At the same time, chip manufacturers that have benefited from strong demand for artificial intelligence since the beginning of the year have been trending weak, as investors question how much of the trillions of dollars in artificial intelligence capital expenditure plans will actually be implemented. This month, a widely used software index rose by 2.2%, narrowing its year-to-date decline to 12%. Meanwhile, the Philadelphia Semiconductor Index fell by 12% in July, although the index has still risen by 78% year-to-date, achieving its best quarterly performance ever. The narrative on AI is changing, is the "buy chip, sell software" strategy failing? "When the market trends are so extreme, my view is that there should be a moderate reversal in positioning," said Bob Doll, Chief Investment Officer at Crossmark Global Investments. He has been increasing his holdings of software stocks while reducing chip stocks. "I don't believe the software industry will collapse, nor do I believe the semiconductor industry has found a new gold mine. Putting the chip industry on a pedestal and denigrating the software industry is somewhat extreme." The divergence in the performance of the two sectors has reached historic levels. Last month, chip stocks recorded their largest single-day excess returns relative to software stocks in history, while also experiencing the largest single-day relative declines. Data going back to 2001 shows that the correlation between the chip index and the software index over 40 days recently turned negative for the first time. Recently, bullish voices on software stocks have been getting louder on Wall Street. Goldman Sachs raised its ratings on three software companies, including Salesforce, Inc., ServiceNow, and Check Point, and pointed out that while artificial intelligence may bring disruptive impacts, previous predictions of the industry's demise were "baseless." Just a day after, HSBC raised its rating on Adobe from "hold" to "buy," stating that the market had overestimated the negative impact of artificial intelligence design tools. At the same time, the situation in the chip sector has become more dire. While Samsung Electronics reported strong financial results on Monday, it failed to lead to a rebound in the sector; media reported on Tuesday that Chinese company DeepSeek is developing chips for artificial intelligence systems, causing the Philadelphia Semiconductor Index to plummet by 4.7%. This news hit on investors' biggest concern: the demand for AI chips and related infrastructure may be lower than expected. For example, news last week indicated that Meta Platforms planned to lease out computing power, which the market viewed as a pessimistic signal of excess computing power, leading to a sell-off of AI infrastructure stocks. Analyst Nate Schindler from Bank of Nova Scotia wrote on July 1st: "The pessimistic interpretation is that a large, hyperscale data center operator is willing to sell excess computational resources while still investing in cutting-edge models, indicating that its internal demand may be lower than capacity, casting doubt on future capital expenditure expectations for the entire industry. We're not calling for a peak in capital spending, nor do we think Meta is slowing down its deployment of cutting-edge technologies, but this is the negative logic that investors will focus on next." Market skepticism is further heating up: prominent investor Michael Burry last week established short positions in NVIDIA Corporation, Applied Materials, and iShares Semiconductor ETF, calling the ETF a "rare index-level pure valuation target with clearly overvalued attributes." Additionally, another company that has invested heavily in AI infrastructure, OpenAI, was originally scheduled to go public this fall, but due to the drastic fluctuations in tech stocks, the IPO is reportedly postponed until next year. Institutional interpretations of the two main tracks: Chip high valuation concerns at the peak, software trends polarize The semiconductor volatility index has nearly doubled since the beginning of the year. Jonathan Krinsky, Chief Market Technician at BTIG, wrote in a report on July 2nd that such volatile market conditions, combined with the sector being close to historical highs, "in a positive light, indicate that a prolonged consolidation period is imminent; in a negative light, it suggests a significant correction." Despite this, the fundamentals of chip stocks remain strong. The sector's earnings growth rate for 2027 is expected to reach 47%, a forecast that has been significantly raised in recent weeks. In contrast, the earnings growth rate for the software and services sector this year is expected to be 16.5%, and this expectation has been continuously declining in recent weeks. Sean Sun, Portfolio Manager at Thornburg Investment Management, said: "Artificial intelligence has changed market perceptions, and the high-profit, recurring revenue, and stable growth business model of the software industry no longer has long-term certainty, prompting the market to re-examine the ultimate value of the industry." Bobby Okampo, Co-Founder and Managing Partner of Blueprint Equity, believes that even though the fundamentals of the semiconductor industry are robust, the current rally in chip stocks may not last much longer, with significant questions still remaining in the market. He said, "The issue is not whether businesses are doing well now, but whether stock prices have already fully priced in. As long as industry growth continues, chips remain a top choice for positioning in the AI space, but no one can predict the industry landscape in the coming years." The logic of the software sector is more complex. Okampo said, "I'm not sure if industry valuations can return to 2021 levels, especially if there is no significant acceleration in growth. However, the market currently looks at all software companies holistically. If software companies are at a disadvantage in the AI wave, then it seems like we won't see a bottom in valuations anytime soon; conversely, if companies can leverage AI for growth, then we have not yet seen the ceiling."