We expect the semiconductor-led pullback to be a temporary de-risking event rather than a major slowdown, which should support a faster recovery, Merrill thinks.

  • The recent sell-off across semiconductor and AI infrastructure stocks is a temporary tactical de-risking event exacerbated by the clearing of over-leveraged trades, rather than a sign that the investment cycle 
  • Hyperscaler capex continues to expand rapidly through 2027 alongside persistent shortages in essential compute and power infrastructure. 
  • Global economic indicators remain positive, with historical precedent showing global semiconductors average a 44% gain over 12 months following similar pullbacks.

A sharp sell-off across semiconductor and artificial intelligence infrastructure stocks is a temporary tactical reset, not a signal that the broader technology buildout has peaked, according to a market analysis by Merrill Chief Investment Officer Chris Hyzy.

The downturn, which saw the MSCI Global Semiconductor Index fall more than 20% from its June peak, was driven largely by short-term de-risking and a forced unwinding of over-leveraged speculative positions rather than deteriorating fundamentals, Hyzy reported in a recent capital market report.

Shortages And Capital Expenditure Drive Expansion

Despite recent market volatility, core demand for artificial intelligence hardware remains strong. Crucial supply chain components needed to build computing capacity and power generation continue to face persistent shortages, while major technology enterprises, often referred to as hyperscalers, project further increases in capital expenditures through 2027.

Hyzy attributed the market friction to natural adjustments occurring as tech firms transition from foundational model training toward agentic systems, physical AI, and eventual quantum computing. These evolutionary shifts often generate brief operational and valuation "speed bumps" as supply networks coordinate complex deployments.

"Execution of this entire process given the coordination needed can have speed bumps," Hyzy noted, emphasizing that such disruptions are characteristic of early-to-mid cycle expansions rather than late-stage economic recessions.

Monitoring Risk Metrics

To gauge potential systemic risks to global technology growth, market analysts are closely watching corporate credit conditions. Hyzy highlighted two key fixed-income metrics: widening credit spreads on debt financing for AI companies and rising costs of credit default swaps (CDS) used to insure against defaults.

These credit indicators are receiving heightened scrutiny as long-dated U.S. Treasury yields climb, with 30-year yields touching benchmark levels not seen since 2007. However, macro-level risk remains contained as global cycle indicators show no signs of an impending downturn.

Historical Trends Point To Rapid Sector Rebound

Historical market data compiled by BofA Global Research highlights the potential for a strong sector rebound, provided broader economic growth holds firm. Following 20% pullbacks in global semiconductors since 1999, the index generated an average 12-month return of 44% when a recession was avoided. U.S. semiconductors demonstrated even greater resilience under non-recessionary conditions, gaining an average of 49% over the subsequent year.

Broad economic health indicators remain supportive. BofA’s proprietary Global Wave indicator has remained positive for six consecutive months, while global earnings revision ratios sit at 1.0. For global semiconductor firms specifically, earnings revisions reached a four-and-a-half-year high of 1.41.

While past cyclical pullbacks took an average of seven to eight months to regain lost ground, Hyzy expects the current recovery to move faster due to strong forward guidance from leading AI infrastructure developers. Consequently, Merrill views the recent volatility as a potential buying opportunity for long-term investors rather than a reason to stay on the sidelines.

Invesco QQQ (QQQ) slipped about 0.1% on Wednesday, the VanEck Semiconductor Index (SMH) eased 1.2%, and the Philadelphia Semiconductor Index (SOX) eased 1.8%.

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