Chip-Software Rotation Reverses as Correlation Turns Negative for the First Time
N.R. Finch
The 40-day correlation between chip stocks and software stocks has turned negative for the first time since records began in 2001, signaling the unraveling of the months-long 'buy chips, sell software' trade as Wall Street upgrades software names and bearish signals pile up on semiconductors.
How did the "buy chips, sell software" trade fall apart?
The playbook for H1 2026 was straightforward: pile into chip stocks, dump software. Since July, that script has flipped — the software index is up 2.2% while the Philadelphia Semiconductor Index is down 12%.
This means → the 40-day correlation between the two sectors has turned negative for the first time. Per Bloomberg data, this has never happened since records began in 2001.
In plain terms = chips and software used to move in the same direction — chips just moved more. Now they move in opposite directions.
Volatility has been historic too: last month, chips posted record single-day outperformance and record single-day underperformance versus software.
Why is Wall Street suddenly bullish on software?
Guggenheim upgraded Salesforce, ServiceNow, and Check Point Software in a single move last week, calling AI's "death sentence" for the software industry "a mirage."
The next day, HSBC upgraded Adobe from hold to buy, arguing the market has overestimated the negative impact of AI design tools.
This means → the institutional narrative has shifted: AI is not software's gravedigger — the prior panic created a buying opportunity.
Crossmark CIO Bob Doll has been adding software and trimming chips. His view: "Chips up the flagpole, software in the basement — that kind of extreme doesn't look right."
The bear case — is AI actually dismantling the software business model?
Thornburg portfolio manager Sean Sun takes the opposite view: AI is proving that software may not be the durable, high-margin, recurring-revenue, steady-growth business it was assumed to be.
In plain terms = software companies locked in customers with subscriptions and collected fees year after year. If AI can replace core software functions, that entire model is in question.
This reflects a debate that goes beyond short-term sentiment — the market is reassessing the terminal value of these businesses.
What bearish signals are hitting chip stocks?
Samsung Electronics reported a beat-and-raise quarter on Monday, yet the stock failed to rally — the good news was already priced in.
News that DeepSeek is developing its own AI chips sent the chip index down 4.7% in a single session. This means → the market fears AI companies bypassing Nvidia to build their own silicon, eroding chipmakers' pricing power.
Reports of Meta selling access to idle cloud-computing capacity raised a separate concern. Bank of Scotland analyst Nat Schindler noted: a hyperscaler willing to sell spare capacity implies internal demand is running below supply, potentially casting doubt on future capex disclosures.
What are marquee investors and the IPO market signaling?
Michael Burry disclosed short positions in Nvidia, Applied Materials, and the iShares Semiconductor ETF last week, calling the ETF "a rare and easily identifiable form of pure index overvaluation."
OpenAI has reportedly postponed its planned fall IPO to next year due to tech-stock volatility.
This means → even the company most bullish on AI is avoiding the current market window — an indirect confirmation of the pressure on chip valuations.
Fundamentals are diverging sharply — what now?
The semiconductor sector's 2027 expected earnings growth stands at 47%, with estimates revised upward in recent weeks. Software and services expected growth is 16.5% for this year, with consensus still falling.
In plain terms = on raw earnings power, chip companies are far outgrowing software companies, and the gap is still widening.
But the core debate is precisely this: is 47% growth enough to justify a stock that has already rallied 78%? Strong fundamentals do not guarantee reasonable valuations. Whether chip stocks can hold their gains at these levels remains the market's biggest open question.
Content is for reference only, not financial advice.