Ren
Head of AI, Ex-Product Manager, AI Supply-Chain Bottlenecks
Semiconductors look set to outperform software. Hedge funds are simultaneously the most overweight semis and most underweight software in a decade, and last year's compression in software valuations made that signal impossible to ignore. Within chips, photonics, memory and CPUs are the favored areas. x.comÂ
Constellation Software, Microsoft and S&P Global deserve higher prices than they trade at after correcting in June, and current levels could be good long-term entries. Near-term headwinds remain: as long as semiconductors and memory lead the market, SaaS will perform poorly, with many hedge funds and institutions long semis and short SaaS. x.comÂ
Memory and mid-cap chipmakers such as Micron, SanDisk, Intel and AMD are taking every domestic inflow that used to go into software, which keeps bleeding. With software slipping, these domestic names are the only ones able to reclaim AI market share, and in a tight global AI race the US government cannot let them fail this year. Intel and Micron are noticeably stronger while Palantir cracks again, and 2026 will not be software's year. x.com x.com x.comÂ
At this stage of the AI cycle, the hyperscalers are better to own than semiconductors. The hyperscalers are the spenders, not the suppliers: if credit tightens and capex is cut, their free cash flow rises while chipmakers lose orders. Positioning also favors the hyperscalers, as long semiconductors is the most crowded trade in the latest BofA Global Fund Manager Survey, at 53%. x.comÂ
Tech and semiconductor bounces are mainly driven by less urgent hedge-fund selling rather than fresh buying. Per Goldman Sachs, tech is still being sold amid very low activity; there is no sign risk has been added yet. The unwind may be nearing its end, especially as hyperscalers stick to capex plans and Q3 semiconductor earnings look likely to be positive. Less crowded positioning and more normal multiples leave a healthier base for a longer-term rebuild. x.comÂ
Semiconductors could capture scarce spot compute's value if its forward curve holds. Compute trades in deep contango, while chip stocks price in little of that value; near-term moves are unpredictable. That makes the sector very bullish. The earlier lab-funding risk looks less acute: Anthropic should hold nearly $200B cash after its IPO and is operating-cash-flow profitable. Even with 2029 capex cuts, chips look cheap if future buyers do not default. x.com x.com x.com x.com x.comÂ
Quality software has room to run and semiconductors' correction has more to go, because positioning is unwinding from opposite extremes. Semiconductors entered the week at the 100th percentile of positioning and software at the 0th, so the rotation is a correction in the most crowded trade. The KOSPI fell 5.5%, with SK Hynix down 9%. AI demand has not changed, but positioning must clear first: stay long Snowflake, Datadog, Fortinet and CrowdStrike, and reduce semis into any bounce. x.comÂ
Semiconductor leaders look better placed than high-beta stocks with poor company models. TSMC, ASML, Nvidia and memory should lead the sector and belong in the buy basket, with Broadcom not far behind. The CPU basket is only a hold: much of its upside was priced in during Intel and AMD's run. x.comÂ
Some semiconductor stocks have returned to reasonable valuations as fundamentals improve, making recent declines buying opportunities. Many had traded at two to three times their median valuations; the correction brought some back toward normal, while sustained AI spending should benefit suppliers for years. x.comÂ
Semiconductor stocks feel overextended and need a period of digestion. x.comÂ
Money should rotate from software back into semiconductors as software multiples get frothier, a contrarian call against the current narrative that SaaS has an AI tailwind. x.comÂ
