Here's what's driving this week's $1 trillion wipeout in chip stocks

• Chip stocks are on track for their worst losing streak in over a year.

• Losses in the sector have hit $1 trillion amid worries about valuations, rates, and increased competition.

• Concerns about funding costs and AI overspending have also started to flare again as bond yields rise.

The AI trade is taking it on the chin this week.

Investors dumped high-flying chip and memory stocks for a second day on Thursday, with the largest names in the sectors shedding more than $1 trillion in market cap this week.

The Philadelphia Semiconductor Index is down 12% from its peak in early October. The index is on track for its seventh day of losses, which would mark its worst losing streak since May 2025.

The major indexes shook off the volatility and pared their earlier losses in the afternoon. The Dow Jones Industrial Average gained more than 500 points, while the tech-heavy Nasdaq was flat.

Here's where US indexes stood at the 4 p.m. ET closing bell:

• S&P 500: 7,744.06, up 0.33%

• Dow Jones Industrial Average: 52,177.69, up 1.08% (+556.21 points)

• Nasdaq 100: 29,935.59, down 0.5%

Here were some of the most notable moves in the chips and AI space:

Here are the factors behind the latest burst of selling across the chips space:

1. Spillover effects from South Korea

The sell-off appeared to begin in South Korea this week. It's a highly-leveraged market that's been rattled by extreme volatility numerous times this year already. SK Hynix and Samsung, which make up more than half of the market cap of the country's KOSPI stock index, began sliding on Tuesday as investors aired concerns about lofty valuations in the sector. The selling quickly spread into areas like Japan and the US.

Investors began selling chip stocks in earnest after Chinese chip firm CXMT said it made progress on a new, denser chip architecture, sparking fears China could be catching up to international memory chip makers.

2. Hot inflation

Hotter-than-expected inflation data has also dampened investor sentiment. September inflation grew at a 3.7% pace, slightly above the 3.6% expected. Producer prices also rose at a 6.3% annual pace in September, its fastest pace since 2022.

Markets are pricing in a 92% probability that the Fed will hike rates at least one more time through the end of the year.

"With a second day in a row of higher-than-expected inflation numbers, it seems the Fed will have no choice but to raise rates again this year," Chris Zaccarelli, the chief investment officer at Northlight Asset Management, said.

Investors flipped the script on the bond sell-off as stocks tumbled. The flight-to-safety trade was in full effect, with 10-year Treasury yield plummeting 13 basis points to 5.06%, even as red-hot inflation readings raised the odds of rate hikes from the Fed.

3. Higher borrowing costs

Higher-for-longer interest rates have been on investors' minds lately, with the recent spike in bond yields adding to the risk-off mood. The 10-year US Treasury yield rose as high as 5.34% in early October before pulling back to around the 5% mark on Thursday, remaining near multi-decade highs.

As yields rise, fears are growing that US Treasurys and hyperscaler debt will increasingly compete for investor capital, driving the yields up for both.

"The concern is that these will cut into future returns, even as the likely timing and size of these returns is far from clear," David Morrison, a senior market analyst at Trade Nation, wrote in a note.

4. Concerns about overspending, slowing revenue

Anthropic told investors it made $16.8 billion in revenue in the third quarter.

Bearish market watchers say the results mark a "worrisome deceleration" from the prior quarter's growth, when revenue more than doubled from $4.7 billion to $11.5 billion, DA Davidson said.

All this is once again raising concerns that tech giants may be overspending on artificial intelligence. The hyperscalers are on track to spend around $800 billion on capex this year, according to a Goldman Sachs report.

"The big story of last night, and really the reason for a tremendous amount of market angst in the last several sessions, was the anticipation and fear around Anthropic's updated #'s," analysts at Jefferies wrote in a client note.

Also on Thursday, CoreWeave stock plunged as investors eyed a spike in its bond yields. The neocloud company has seen its bonds due in 2032 surge from 9.625% when they were issued in June, to almost 15% this week.

Morrison flagged the worry among some investors that tech giants may be "overspending on capacity which may never get used."

Some analysts are eyeing the possibility that the chips rout may be nearing its end. Strategists on JPMorgan's market intelligence team floated a possible "inflection point" in the sector, given how chip stocks remain around 15% below their all-time highs in June.

"We think Semis can climb this latest wall of worry as recent earnings updates from Hynix / Samsung point to on-going thematic strength. Separately, breadth continues to deteriorate which we think can reverse into / out of earnings season which will buttress the rally," the bank wrote earlier this week.

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