A significant downturn in artificial intelligence (AI) related stocks, triggered by the launch of a powerful new model from a Chinese startup, sent a closely watched US semiconductor index into bear market territory on Friday. This global tech sell-off reverberated across international markets, pulling Canada’s S&P/TSX composite index lower alongside its US counterparts. Investors are now keenly awaiting Monday’s inflation figures from Statistics Canada, which could provide further direction for the markets.
Semiconductor Sector Plunges into Bear Market
The Philadelphia semiconductor index, a bellwether for the chip industry, experienced a sharp decline, shedding 1.6% on Friday and marking its third consecutive day of losses. This sustained sell-off has pushed the index a significant 20% below its record high set on June 22. According to Reuters, this marks a technical bear market, a term generally defined as a drop of 20% or more from recent highs. Bloomberg further corroborated this assessment, highlighting the breach of this critical threshold.
The past week proved particularly brutal for the semiconductor sector, with the index losing approximately 10% of its value, marking its worst weekly performance in over a year, as reported by CNN. Despite this significant pullback, it is important to note that the index still boasts an impressive gain of 65% year-to-date in 2026, underscoring the volatility and rapid growth characteristic of the AI boom.
Canadian Markets Follow Global Trend
Canada’s primary stock market index, the S&P/TSX composite, mirrored the global bearish sentiment. It closed Friday down 76.30 points at 35,263.85. The technology sector was the most significant drag on the index, reflecting the widespread concerns about the valuation and future prospects of AI-driven companies. The Canadian Press reported on the broad market movements.
Steve Locke, Chief Investment Officer for Fixed Income and Multi-Asset Strategies at Mackenzie Investments, commented on the situation, suggesting that the global technology cycle had indeed influenced Canadian tech stocks. However, he characterized the current market movement as minor volatility, implying that it might not signal a more profound or sustained downturn.
The Catalyst: Moonshot AI’s New Model
The latest leg of the AI stock downturn was directly linked to the unveiling of a new, highly capable AI model by Chinese startup Moonshot AI. The company announced that its Kimi K3 system is the world’s largest open-weight AI model, achieving performance levels that rival those of Anthropic’s leading models. Reuters reported on the technical specifications, while CNN further elaborated, stating that the Kimi K3 system approaches the capabilities of Anthropic’s Claude Fable 5.
This development has rekindled anxieties reminiscent of early 2025, when China’s DeepSeek AI similarly rattled global markets with the introduction of its low-cost AI model. Analysts are drawing parallels between these events, highlighting the increasing competitive pressure from Chinese technology firms in the rapidly evolving AI landscape.
Competitive Pressures and Valuation Concerns
The emergence of cheaper, open-source AI models from China poses a direct threat to the subscription-based revenue streams of established US AI developers. This, in turn, could impact the demand for the specialized chips that are essential for building and training these advanced AI systems. CNN highlighted this crucial dynamic, explaining how increased competition can affect the entire value chain.
Nvidia, a titan in the AI chip manufacturing space and a significant weight on the S&P 500, experienced a notable decline of 2.2% on Friday. Its market capitalization briefly dipped below that of Apple, falling to as low as US$4.85 trillion before recovering to end the session as Wall Street’s most valuable company. This fluctuation underscores the intense scrutiny and sensitivity surrounding the valuations of AI-centric companies.
Memory and storage chip manufacturers also bore the brunt of the sell-off. Micron, for instance, has seen its stock price fall by approximately 30% since its late-June record high. However, even with this correction, CNN reported that Micron still maintains a substantial gain of nearly 200% for the year, illustrating the extraordinary performance of the sector prior to the recent downturn.
Broader Market Declines and Geopolitical Tensions
The ripple effect of the AI sell-off was evident across major US indices. The S&P 500 fell 1% to 7,457.69, the Dow Jones Industrial Average dropped 406.55 points, or 0.77%, to 52,146.42, and the Nasdaq composite lost 1.40% to close at 25,520.24. For the week, the S&P 500 shed 1.55%, the Nasdaq declined 2.9%, and the Dow fell 0.93%, according to Reuters.
Adding to the market’s pressure, oil prices saw a significant surge. Brent crude, the international benchmark, jumped 4.6% to settle at US$88.10 per barrel, its highest level since June 11. This represents a notable increase from its roughly US$76 per barrel valuation a week earlier, as reported by CNN. West Texas Intermediate crude also climbed, rising about 4.5% to US$82.49 per barrel.
The rise in oil prices followed an expanded US airstrike campaign against Iran, which reportedly damaged bridges and caused a tower collapse at a key Iranian port. This escalation has renewed concerns about potential disruptions to crude shipments through the critical Strait of Hormuz, a vital chokepoint for global oil supply.
Canadian Inflation Data on the Horizon
Despite the drag from the technology sector, the TSX’s energy sector benefited from the rising oil prices, according to Steve Locke of Mackenzie Investments. However, the immediate focus for Canadian markets is the upcoming inflation data from Statistics Canada, due on Monday.
A Reuters poll of economists, referencing LSEG Data & Analytics, anticipates that the annual inflation rate cooled to 2.9% in June from 3.2% in May. This projected decline is expected to be partly attributed to falling gasoline prices. Locke further noted that core inflation in Canada has been running close to the Bank of Canada’s target of approximately 2%.
"The inflation story is not quite as hard to manage here for the Bank of Canada," Locke stated. He did, however, caution that the recent climb in oil prices could introduce complexities for July’s inflation figures.
Divergent Views on Market Correction
Market participants hold varying perspectives on whether the current sell-off represents a buying opportunity or a precursor to further declines. Jake Seltz, a portfolio manager at Allspring Global Investments, observed that investors have grown increasingly uneasy about the pace of AI spending and the potential for an AI-driven bubble. He told Bloomberg, "Ultimately, we need to see a re-acceleration in revenue." Despite these concerns, Seltz indicated that he would view any further weakness as a chance to increase his positions, believing that the AI cycle still has "a couple more years of great returns" ahead.
Similarly, Sameer Samana of Wells Fargo Investment Institute echoed a sentiment of cautious optimism. He suggested that markets were "just looking for any excuse to sell" and emphasized that competitive pressures from China are not a new phenomenon.
Upcoming Earnings to Scrutinize AI Spending
The next two weeks will be critical for the market as the biggest AI spenders are scheduled to release their earnings reports. Investors will be closely examining these results for evidence that the substantial investments in AI are yielding tangible returns. Bloomberg noted the heightened anticipation surrounding these announcements.
Tesla and Alphabet are slated to report their quarterly results on Wednesday, followed by Microsoft, Meta, Apple, and Amazon in subsequent weeks. Nvidia’s earnings report is expected later next month. Alphabet’s capital expenditures are projected to more than double this year to US$187 billion, while Alphabet, Microsoft, Amazon, and Meta collectively anticipate capital expenditures of up to US$725 billion for the year, according to reported projections. These figures highlight the immense scale of investment in the AI infrastructure and development.
Currency and Commodity Market Movements
In currency markets, the Canadian dollar traded at 71.36 US cents, showing a slight increase from its 71.24 US cents level on Thursday. Meanwhile, the August gold contract saw a notable rise, gaining US$26.70 to settle at US$4,018.80 per ounce, reflecting its traditional role as a safe-haven asset amidst market uncertainty.
