A Second “Kimi Moment” Sends Chip Stocks Into a Bear Market

Photo by Chris Ried on Unsplash

Wall Street received a startling message that the AI boom may turn into a bust quickly. On Friday, the Philadelphia Semiconductor Index tumbled into official bear market territory, down more than 20 percent from the record high it set in late June. The semiconductor industry, which had been the stock market’s top performer this year, has lost a staggering $1.5 trillion in market value in little more than three weeks time.

The trigger came from a weird place. The company behind the Chinese AI venture, Moonshot, has introduced a new model, Kimi K3, which, according to investors and engineers, is on par with the best AI models available from OpenAI and Anthropic and seems to have been developed on a lower budget than Western labs. Traders soon started using a fresh ‘Kimi moment’ reference, referring to the surprise DeepSeek faced with its markets announcement last year that the high-tech AI doesn’t need extensive capital expenditures, like Nvidia, Broadcom and other chipmakers were training them to believe. The message from both episodes is the same: when powerful AI can be constructed on a much smaller budget, the trillion dollar gamble on ever-larger data centers and chip orders seems a lot more tenuous.

The issue whether the AI industry’s spending binge is ultimately sustainable has been rumbling for months. The chip benchmark was one of the strongest sector rallies in recent memory, up 105 percent from its March low last month, driven by the notion that demand for AI infrastructure was limitless. Moonshot’s success has convinced doubters that that was a safe bet to take, and the calming has been rapid. Friday’s trading was the only day on which the Nasdaq Composite index declined, by 1.4 percent, as a weight of chip names pushed the broader market index down 0.7 percent and the S&P 500 dropped 1 percent.

The damage wasn’t confined to semiconductors. Netflix’s stock plunged over 10 percent after the company’s latest quarterly guidance fell short of Wall Street estimates, despite its latest quarterly results beating estimates. That’s been a pattern and a punishment that’s been repeated a lot this earnings season: Investors are now punishing companies that suggest growth is slowing, and they’re rewarding those that beat a low threshold. As oil prices absorb the tech rout, however, the price of oil has surged almost 2 percent above 80 dollars a barrel as tensions between the United States and Iran have flared.

There was one silver lining. A University of Michigan preliminary July consumer sentiment reading rose 10 percent to 54.4 from June’s 49.5, helped mainly by a decline in the cost of gasoline. The American consumer, whose spending is the foundation of much of the economy, is a small sign that the market’s turbulence is not crushing the American consumer, even as the headlines become negative.

The next major hurdle for investors is whether Moonshot’s success is a new trend or a passing fad that will diminish once the quarterly results start to come in from Nvidia and other AI chip makers later this earnings season. Regardless, the pace of this turnaround is a helpful reminder that nothing can be more powerful than a single product announcement out of Beijing to turn a market’s most popular trade. The week has been a stress test so far for the AI trade, which has been driving markets for most of the past two years, and there are still close to 80 S&P 500 companies to report earnings in the next few days.