For the better part of 2026, the playbook was simple: buy chips, sell software. Ride the AI wave on the hardware side, bet against the legacy software names getting disrupted by it.

Hedge funds have now sold US semiconductor stocks for four consecutive weeks as of early July, marking a sharp reversal in what had been the most crowded tech trade of the year. The semiconductor-to-software performance gap, which hit extreme highs earlier in 2026, is now compressing fast.

The unwind in numbers

Memory makers have taken the worst of it. Micron and Sandisk saw single-day drops exceeding 10-14% during June. Even Nvidia declined roughly 3-6% across multiple trading sessions in the same stretch.

On the other side of the trade, software stocks haven’t exactly rallied to fill the gap. Anthropic’s tool announcements back in February triggered notable drops across the software sector, setting a tone that hasn’t fully lifted.

Why the trade worked, and why it stopped

The logic behind the chip-over-software trade was sound, at least initially. AI infrastructure requires enormous quantities of GPUs, memory chips, and custom silicon. Software companies, meanwhile, face an existential question about whether AI agents will replace their products entirely or merely make them cheaper.

Profit-taking is the most immediate explanation. Funds that loaded up on chip names earlier in the year are now booking gains before the summer liquidity drought sets in. A deeper concern: AI monetization timelines remain uncertain. Companies are spending billions on AI infrastructure, but the revenue models built on top of that infrastructure are still evolving.

What this means for investors

For equity-focused investors, the immediate question is whether this represents a healthy correction or the beginning of a more sustained rotation. Four weeks of selling is notable, but it’s not yet catastrophic.

Investors should be watching two things closely in the weeks ahead. First, whether the hedge fund selling in semiconductors accelerates or stabilizes, which will determine if this is a correction or a capitulation. Second, whether software earnings in the upcoming reporting season show enough resilience to attract the capital fleeing chip stocks, or whether both sectors continue drifting lower in tandem.