Stock market selloff: is the semiconductor trade becoming stretched?

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Stock markets sold off late last week as strong economic data combined with underwhelming results from one semiconductor giant pushed investors towards the exits.

The S&P 500 fell 2.6% on Friday 5 June, with Broadcom (NASDAQ:AVGO) – the index’s seventh-largest constituent – shedding 7.9%. It marked three consecutive sessions of losses for the company, which is viewed as one of Nvidia’s key competitors in the lucrative artificial intelligence (AI) semiconductor market, during which Broadcom’s shares fell 19.9%.

As can be the way with crowded trades, Broadcom’s woes soon spread to other stocks and funds.

The Nasdaq Composite – which contains all shares on the tech-dominated index – fell 4.3% in the two sessions to 5 June. The iShares Semiconductor ETF, which tracks the NYSE Semiconductor Index, fell 12.3% over the same period.

Which factors have contributed to the stock market selloff?

While the selloff was sparked by Broadcom, more macro factors came into play later in the week.

US labour data was released on Friday 5 June. It showed an unexpectedly strong job market, with 70,000 new jobs added in May (compared to a monthly average of 14,000).

This labour market strength reduces the likelihood of a cut to US interest rates, and in fact increases the chances that the Federal Reserve (Fed) could raise rates amid fears of higher inflation as a result of the war in Iran.

High interest rates are negative for equities, particularly tech stocks, because they tend to restrict the amount of future growth in an economy.

“Friday’s US jobs report sparked a firestorm of selling, with big tech bearing the brunt of the wobble in confidence,” said Susannah Streeter, chief investment strategist at wealth manager Wealth Club. “Indices in Asia have been hit by the contagion of pessimism, with semiconductor stocks falling sharply.”

On 8 June, the US tech selloff combined with fears that the fragile ceasefire in Iran might be shattering led to the Korean stock market pausing trading for 20 minutes following a decline of more than 8% – having already had to trigger a circuit breaker in March following the start of the conflict.

Korea’s stock market is dominated by semiconductor stocks SK Hynix and Samsung, both of which fell late last week.

Why did Broadcom’s shares sell off?

On 3 June, Broadcom announced its results for the second quarter (Q2) of the 2026 fiscal year.

Revenue increased 48% year-on-year to $22.19 billion. This was a slight miss on analysts’ expectations; those polled by the London Stock Exchange Group yielded a consensus revenue estimate of $22.27 billion.

This miss was compounded by the fact that Broadcom reiterated its guidance of $100 billion in AI chip sales for 2027.

These might not sound like significant problems, but the market has got used to AI companies exceeding analyst targets and frequently raising their outlooks.

“Although the huge earnings it’s raking in are highly impressive, a very high bar has been set,” said Streeter.

Because Broadcom is a supplier to the broader AI industry, the appearance that its growth trajectory might be decelerating led to fears that demand for other AI-related stocks might slow.

Is there an AI bubble, and is it bursting?

Since the explosive growth of AI stocks from 2023, many investors have been wary of the prospect of an AI bubble.

Valuations of big tech stocks, particularly the Magnificent 7 and close competitors like Broadcom, rose rapidly on expectations that the future growth of AI would drive rapid increases in revenue and profits for many years to come.

These heightened expectations leave these stocks susceptible to any slight counter to the narrative of continued, rapid growth. Expectations are very high, and moments like Broadcom’s underwhelming guidance undermine the exuberance that the market has become accustomed to.

“Given how heady tech valuations have become, it’s not surprising that investors are reassessing allocations and opting for companies with more reliable income streams and dividends,” said Streeter. “There had already been undercurrents of worry about the surge in tech stock prices and fears that today’s insatiable demand for the apparatus needed to support AI products and services would eventually wane.”

Should you join the stock market selloff?

Whether or not you sell stocks following the recent market pessimism is going to be a factor of your current portfolio and risk preferences.

As a general rule, though, it is often best to avoid knee-jerk reactions to short-term market moves.

Making regular investments can help to take the emotion and decision-making out of investing, and can mean you buy stocks at lower prices during short-term downturns.

You could also see the current pessimism around tech stocks as an opportunity to look to other sectors.

“Tech is starting to fall out of fashion, while companies operating in the ‘real economy’ may be more sought after – those selling consumer staples, providing healthcare, or keeping the lights on through utility services,” said Streeter.