3 Reasons Why the Chip Stock Rally Is Over - For Now

After a dream run-up in share prices over the last several years, 2025 has been a rough ride for the semiconductor sector, with big brand names like Nvidia, Advanced Micro Devices, and Taiwan Semiconductor all in red numbers this year.

"When we look at the semiconductor space right now, we’ve seen the industry began to recover pretty strongly last year, but a lot of that growth, that recovery was very uneven," said Mario Morales, group vice president of enabling technologies and semiconductors at IDC in San Francisco.

Here’s why – and why the bull market in chip stocks may be over, for now.

Additionally, the larger industry names are grappling with supply chain snarls, geopolitical chess games, and the relentless pace of technological evolution. "Meanwhile, the race for AI supremacy has turned into more of an arms race, with companies scrambling to outdo each other in the quest for faster, more efficient chips," said Lars Nyman, chief marketing officer of Portugal-based CUDO Compute. "Production costs soar, and the demand for chips seems to skyrocket like a meme stock. Yes, the thirst for more advanced nodes continues unabated, but foundries are pushing full throttle just to stay afloat."

The above issues can and have negatively impacted semiconductor stocks of late, but industry c-suite types at least expected those headaches. But other threatening, and mostly unexpecting, threats have loomed large in early 2025 and have taken a swipe at sector share values.

These three semiconductor threats lead that list:

The dismantling of the CHIPS and Science Act

The Biden administration shepherded the CHIPS Act to a successful package and managed to get funds flowing to the chip sector, but the billions of dollars still on the table will likely be clawed back.

"When President Biden was leaving, you saw his administration push a lot of the CHIPS Act funds as quickly as they could because there was a lot of concern that the new administration would either slow it down or cancel it completely," Morales said. "So, companies like Intel INTC received a billion dollars in December and another, just over another billion dollars in January to map to the 7.8 billion that was earmarked for them."

Now, the US semiconductor industry, the primary beneficiaries of the CHIPS Act, is starting to see the Trump administration cutting back on National Institute of Science and Technology (NIST) employees, and that's stopped the flow of CHIPS funds to a trickle. "The NIST employees were vetting, managing, and issuing the funds to the companies that have already been awarded, and we’re starting to see some of that being dismantled now," Morales noted.

Another key CHIPS Act issue may even loom larger for semiconductor firms, as the Act's bylaws extended far beyond direct funding.

"People tend to look at the amount of money that’s been issued by the government, and they only see that," Morales said. "They don’t see the bigger investment profile, which is the fact that once these companies started working with the CHIPS Act, they also started getting tax incentives."

Those tax incentives are 25% on any type of manufacturing that semiconductor-related companies produce and deliver in the US. "These tax incentives were even more successful," Morales added "They drove over $200 billion worth of commitments by the semiconductor ecosystem as a whole."

The DeepSeek saga

China-based AI company DeepSeek threw the semiconductor industry – and the stock market – into panic mode with its January claim that company engineers had figured out how to produce stellar AI software models at a deeply discounted price. That news sidelined bigger name chip stocks for a week and left many more investors wondering if the Nvidia's NVDA of the world would take a big financial hit.

"DeepSeek put a dent in maybe the greatest AI success story of the last few years – especially Nvidia, which makes specialized semiconductor chips for AI inference and training," said Gimme Credit's Senior bond analyst Saurav Sen in an email to Benzinga.

Nvidia's seemingly insurmountable moat was challenged, perhaps ironically, as DeepSeek used Nvidia's older chips to train its models to be good enough not to need the latest-and-greatest Nvidia chips, Sen reported.

"The market ignored the irony by sending Nvidia's stock down about 20%, although it has recovered partially in the last month," he said. "The rough thesis was that everyone would emulate DeepSeek's efficient models, thereby reducing the need for advanced Nvidia GPUs and deflating Nvidia's baked-in and often lofty growth projections."

Other technology industry experts say that lower-cost AI solutions could pressure players like Nvidia. "However, at this point, the nature and design of those chips used by DeepSeek is not completely certain," said  Dave Novosol, senior analyst at Gimme Credit. "Therefore, the extent of any competitive advantage versus Nvidia cannot be determined. Moreover, as the use of AI broadens and deepens, the chips produced by Nvidia may be necessary to meet the demands of future model builders."

The short-term impact on Nvidia is expected to be minimal because the dynamics of the AI arms race remain unchanged.

"Microsoft MSFT, Meta META, and Google GOOG still believe more compute equals better models, that they will just be able to build better models than they originally projected with their planned hardware purchases," said Dev Nag, CEO/Founder at QueryPal, a former co-founder at Wavefront, and a former senior engineer at Google.

Nag said the tech sector is seeing a recalibration of expectations rather than a fundamental reduction in short-term demand. "Big tech understands that DeepSeek-style optimizations work multiplicatively with hardware advances, not as substitutes," he noted. "Architectural efficiency creates more value per GPU, but doesn’t diminish the incentive to buy more GPUs."

However, the longer-term picture gets murkier for Nvidia. 

"If a small team can achieve breakthroughs while working with export-restricted chips, it suggests Nvidia’s moat might be more vulnerable than previously thought," Nag said. "Companies like AMD AMD, Intel, and various AI ASIC startups will seize on these efficiency techniques to challenge Nvidia’s dominance."

The real threat to Nvidia isn’t that people will buy fewer chips overall but that customers might increasingly buy those chips from competitors with stronger price-performance ratios. "This gives potential Nvidia competitors renewed hope; they don’t need to match Nvidia’s raw performance to be viable alternatives if they can offer better price-performance through DeepSeek-style architectural innovations and software optimizations."

Tough Tariffs

New tariff policies targeting foreign semiconductor manufacturers, particularly those in China, are intended to drive reshoring efforts but also bring potential problems to the table.

"Tariffs also introduce risks such as higher production costs, supply chain disruptions, and potential retaliatory trade measures," said Kaveh Vahdat, founder and president of RiseOpp, a fractional CMO and SEO firm based in San Francisco. "For U.S.-based semiconductor firms, tariffs could create pricing pressures on raw materials and manufacturing equipment. For investors, key considerations include how companies can absorb increased costs or pass them on to customers without affecting demand."

The Takeaway on Semiconductor Sector Challenges

It's not just public policy and competition that vex semiconductor c-suites – structural changes are also challenging industry firms.

"Industry companies are also facing supply chain realignment," Vahdat said. "Companies are diversifying supply chains to reduce reliance on China, shifting production to Southeast Asia and India. This transition carries execution risks, cost implications, and time delays."

Talent shortages are also hindering sector performance. "The industry is facing a shortage of skilled labor, particularly in semiconductor fabrication and chip design," Vahdat added. "Workforce development will be a key determinant of manufacturing capacity."

Fundamental capital intensity issues add further uncertainty to the mix. "Expanding semiconductor production requires significant investment," Vahdat noted. "Companies must balance high upfront costs with uncertain demand cycles, especially amid potential economic slowdowns."

Semiconductor investors will have to balance the upside in AI, cloud computing, and data centers, among other sector home runs, with a growing number of challenges holding the semiconductor back.

Until those challenges are met head-on, sector share growth will likely continue to be muted, making 2025 a fascinating and complex year for the semiconductor industry and its army of increasingly nervous investors.

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