Author: Claude, TechFlow TechFlow
TechFlow Summary: The Semiconductor ETF (SOXX) has surged 78.5% year-to-date, while the Software ETF (IGV) has fallen 12.5% over the same period, with a return gap of more than 90 percentage points, reaching an extreme level in history.
SanDisk led the S&P 500 with a 426% year-to-date gain, Intel tripled, and Micron rose 154%, while Microsoft, Adobe, and Salesforce all saw year-to-date declines exceeding 17%. The four major hyperscale computing companies' combined capital expenditures are approaching $700 billion by 2026, with funds pouring into the chip supply chain like a black hole. Meanwhile, the software sector is facing a double whammy of AI replacement narratives and capital flight.
Recently, a popular post on the investment section of the overseas Reddit forum is that semiconductor stocks are "basically a black hole that sucks everything else away," which has resonated with many people.
Data validates this intuition. As of the closing bell on May 22, the iShares Semiconductor ETF (SOXX), which tracks the semiconductor sector, has a year-to-date return of 78.5%, while the iShares Extended Technology Software ETF (IGV), which tracks the software sector, has a return of -12.5% over the same period. The two ETFs, both belonging to the technology sector, have a year-to-date return difference of over 90 percentage points.
According to Tickeron, all software stocks in the S&P 500 have now fallen below their 200-day moving averages, while approximately 89% of semiconductor stocks remain above their 200-day moving averages. The two sectors both fell to the zero line simultaneously during the 2022 bear market, after which their performance diverged dramatically. This divergence was not gradual, but rather explosive.
SanDisk surges 426%, leading the S&P 500; Intel's triple-digit gain crushes AMD.
The figures at the individual stock level are even more exaggerated.
According to Benzinga Pro data, SanDisk (SNDK) has risen approximately 426% year-to-date, making it the best-performing stock in the S&P 500 by 2026, following a 559% surge in 2025. This memory chip company, spun off from Western Digital, has seen its NAND flash memory prices rise by over 200% year-over-year, driven by AI. Its March quarter revenue increased by 250% year-over-year to $5.95 billion, with a non-GAAP gross margin as high as 78.4%.
According to 24/7 Wall Street, Intel (INTC) has risen approximately 222% to 225% year-to-date, double the gains of AMD. Intel's rebound stems from an extremely low base, coupled with progress on its 18A process node, rumors of Apple manufacturing orders, and improved yield data disclosed by CEO Chen Liwu in a CNBC interview. Short sellers have been severely overwhelmed; according to S3 Partners data, Intel's market capitalization has increased by over $440 billion since its low on March 30, resulting in short sellers short paper losses exceeding $12 billion.
Micron (MU) has risen approximately 154% year-to-date, with a cumulative increase of 661% over the past 12 months. Financial results also support this trend: Q2 fiscal year 2026 revenue reached $23.9 billion, a year-on-year increase of 196%, with adjusted earnings per share of $12.20, far exceeding market expectations of $9.21. DRAM accounted for 79% of total revenue, with high-bandwidth memory (HBM) being the core driver. SK Hynix Chairman Chey Tae-won even predicted that the memory chip shortage may continue until 2030.
In contrast, NVIDIA (NVDA), the true "money-printing machine" of AI computing power, has seen its stock price rise by approximately 8% to 15% year-to-date, far underperforming the aforementioned second-tier semiconductor companies. According to The Motley Fool, NVIDIA's current forward P/E ratio is approximately 21.5, almost on par with the S&P 500's 20.3. This indicates that the market is no longer paying a growth premium for NVIDIA, and funds are instead flowing into chip companies with lower valuations and greater potential for growth.
$700 billion in capex: An arms race among hyperscale computing companies.
The surge in semiconductor prices is backed by substantial financial investment.
According to data compiled by the Financial Times and multiple institutions, the four major hyperscale computing companies—Microsoft, Alphabet (Google's parent company), Amazon, and Meta—are projected to have combined capital expenditures between $650 billion and $725 billion in 2026, nearly double the approximately $410 billion in 2025. This represents the largest concentrated infrastructure investment cycle in technology history.
According to Tom's Hardware, Jefferies analyst Brent Thill stated bluntly: "The AI economy is healthy. Bearish sentiment is rubbish."
Specifically, Amazon led the pack with $44.2 billion in capital expenditures in a single quarter, while AWS grew by 28%; Alphabet's first-quarter capital expenditures reached $35.67 billion, more than doubling year-over-year, and Google Cloud's backlog of orders jumped to over $460 billion; Microsoft's capital expenditures for calendar year 2026 reached $190 billion, of which approximately $25 billion came from rising prices for memory chips and components; Meta raised its full-year capital expenditure guidance to $125 billion to $145 billion.
According to statistics from Om Malik's blog, three hyperscale computing companies recorded substantial non-cash investment gains in their Q1 financial reports: Alphabet recorded $36.8 billion (mainly from the appreciation of Anthropic equity), Amazon recorded $16.8 billion, and Microsoft recorded $5.9 billion (from OpenAI). While capital expenditures are burning through cash rapidly, the AI investment targets themselves are also continuously appreciating in value.
Software stocks were strangled by the narrative of AI replacing traditional industries, with IGV experiencing its worst drop since 2008.
The other side of the coin is the devastating collapse of software stocks.
According to The Motley Fool, the software sector experienced a sharp decline after Anthropic released Claude Code in early 2026—the market's logic was not to reward AI innovation, but to punish SaaS companies that might be replaced by AI. IGV recorded its biggest drop since 2008 at one point.
As of late May, Microsoft was down about 17% year-to-date, Adobe about 32%, Salesforce about 31%, and Shopify about 26%. The S&P 500 Software and Services Index was about 21% below its 200-day moving average, the largest deviation since June 2022. According to data from Goldman Sachs and other institutions, short positions in mid-to-large-sized software companies have surged in the past three months, with cybersecurity and SaaS companies being the most heavily shorted sectors.
There are two layers of logic behind this divergence. The first is a direct capital drain: market liquidity is limited, and when $700 billion in capital expenditure pushes chip stocks into a parabolic trajectory, funds must be withdrawn from somewhere. The author of that Reddit post put it precisely like this: "Software companies with sound fundamentals are just sitting still or declining, while the semiconductor index is soaring."
The second layer is the reconstruction of the valuation narrative. The rapid evolution of AI agents has led the market to re-examine the moat of the SaaS business model: when AI can automatically complete programming, form filling, and customer service, how long can the subscription model that charges per seat last? The Motley Fool points out that software companies that can survive need to have features that AI cannot easily replace, such as real data, proprietary workflows, and deep customer integration.
Cyclical peak or structural transformation? Two key questions remain unresolved.
The Reddit user asked two questions at the end of the post, which can be considered the ultimate questions for investors about whether the semiconductor sector can continue to be hot.
However, neither of these questions has been answered to this day.
First: How long can the capital expenditure of hyperscale computing companies be sustained?
According to CNBC, Pivotal Research predicts that Alphabet's free cash flow will plummet by nearly 90% to $8.2 billion in 2026, down from $73.3 billion in 2025. Of Microsoft's $190 billion in annual capital expenditures, $25 billion was consumed by rising prices for memory chips and components alone. These companies are betting future profits on AI revenue that has not yet been fully realized.
Second: Is software the next area of focus?
According to Hartnett, Chief Investment Officer of Bank of America, in a previous Flow Show report, software is one of the best sectors to go long contrarian in the second quarter of 2026, because the sector’s deviation from the 50-day and 200-day moving averages has become extreme.
However, this doesn't mean the semiconductor rally is over. The Philadelphia Semiconductor Index (SOX) recorded a record 18-day winning streak on April 25th, with a gain of approximately 45%. According to Intellectia analysis, some senior analysts are beginning to draw parallels between the current trend and the dot-com bubble of 1999-2000, warning of a potential 25% to 30% pullback. But the SOX has won 22 out of the past 23 trading days, hitting 15 intraday all-time highs, and this momentum itself is a signal.
As that Reddit user put it, "I don't want to call a top because I've been proven wrong too many times before. But the high concentration of gains in a single sector is starting to smell like the late stages of a cycle."
