--- title: "After the sharp drop in AI hardware: Should you adjust your position or your industry outlook?" type: "Topics" locale: "en" url: "https://longbridge.com/en/topics/43180712.md" description: "In July 2026, AI hardware assets experienced the most intense centralized liquidation since the start of this industrial cycle. The Asia-Pacific IT sector fell by 13.5%, the Korean market dropped by 17.9%, and Taiwan's stock market declined by 5.3%; the MSCI China Information Technology sector fell by 18.4%, while the ChiNext Index and STAR 50 retraced by 22.6% and 25.5%, respectively. Single-month declines for representative companies in optical communications, memory design, and PCBs reached 45%–56%. Compared to the drop in stock prices, changes in industry data were significantly more moderate..." datetime: "2026-08-04T11:11:49.000Z" locales: - [en](https://longbridge.com/en/topics/43180712.md) - [zh-CN](https://longbridge.com/zh-CN/topics/43180712.md) - [zh-HK](https://longbridge.com/zh-HK/topics/43180712.md) author: "[潘驴邓晓闲缺一](https://longbridge.com/en/profiles/27015735.md)" generator: "portal-rs" --- # After the sharp drop in AI hardware: Should you adjust your position or your industry outlook? In July 2026, AI hardware assets experienced the most significant concentrated liquidation since the start of this industrial cycle. The Asia-Pacific IT sector fell by 13.5%, the Korean market dropped by 17.9%, and Taiwan's stock market declined by 5.3%; the MSCI China Information Technology sector fell by 18.4%, while the ChiNext Index and STAR 50 retraced by 22.6% and 25.5%, respectively. Some representative companies in optical communications, memory design, and PCBs saw single-month declines of 45%–56%. Compared to the drop in stock prices, changes in industrial data were noticeably milder. Forward 12-month earnings forecasts for the Korean and Taiwan markets continued to be revised upward in July. TSMC's revenue, profit margins, and Q3 guidance remained high, HBM4 continued mass production, and cloud providers did not cut their AI infrastructure budgets. The core judgment of this article is: the July retracement primarily occurred at the position and valuation levels; AI hardware has not yet entered a downward earnings cycle. The most urgent forced selling pressure is nearing its end, and subsequent market trends are more likely to show recovery among leading companies and divergence across sectors. ![2026年7月AI硬件回撤对比](https://pub.pbkrs.com/uploads/2026/8735e9583ebb426b7ef829c59975cb4b?x-oss-process=style/lg) Performance of AI hardware-related markets and indices in July 2026. Differences exist in the calculation methods of various market indices; horizontal comparisons are mainly used to observe the intensity of the retracement. ## **I. The Dominant Variables Behind the July Retracment Were Positions and Valuations** Over the past year, high-yield assets in Asian markets were highly concentrated in semiconductors, memory, optical modules, PCBs, servers, and related equipment materials. Upward revisions in earnings forecasts, rising valuations, and capital inflows reinforced each other, leading active growth funds, quantitative momentum strategies, long-short equity funds, and leveraged ETFs to gradually form similar portfolios. In July, this setup reversed. JPMorgan calculated that the 12-month price momentum factor for Asian markets (excluding Japan) retraced approximately 40% from its peak, marking the largest momentum correction since 2009. Individual companies did not experience obvious operational negative news, yet their stock prices still fell significantly, indicating that risk budgets at the fund level had overridden fundamental judgments at the company level. **Price Transmission Path:** Leading stocks retract → Leveraged products reduce positions → Index volatility rises → Quantitative strategies lower risk exposure → High-elasticity supply chain stocks follow suit. South Korea acted as the main amplifier for this deleveraging process. The Korean index has high exposure to Samsung Electronics, SK Hynix, and related semiconductor assets. Liquidating leveraged products simultaneously impacts the index, leading stocks, and the supply chain. JPMorgan estimates that the cleanup of Korean leveraged ETF positions is basically complete, with hedge fund deleveraging progress reaching about 90%. This means the worst liquidity phase has likely passed, but the end of forced selling only resolves trading pressure; valuation repair still requires earnings support. | **Market** | **July Performance** | **Concurrent Earnings Forecast Changes** | | ------------------- | -------------------- | ----------------------------------------------- | | Korean Market | **-17.9%** | Forward 12-month EPS forecasts continue to rise | | Taiwan Stock Market | **-5.3%** | Forward 12-month EPS forecasts continue to rise | The simultaneous occurrence of falling stock prices and rising earnings forecasts clearly points to valuation multiples and portfolio structure, rather than earnings direction. Macro disturbances and rising interest rates in July mainly served to amplify these effects, rather than serving as core evidence of an industrial cycle reversal. ## **II. Cash Flow Scrutiny Pressured Valuations, Not Equivalent to Weakening Orders** Over the past two years, when cloud providers increased capital expenditures, it typically directly boosted order expectations for GPUs, HBM, advanced process nodes, switches, optical modules, and PCBs. After July, the market began simultaneously calculating the funding sources for capital expenditures, depreciation pressures, and return periods. While AI computing demand continues to grow, capital investment is increasingly occupying free cash flow. ![云厂商现金流与资本开支](https://pub.pbkrs.com/uploads/2026/3692a775dd7f40235761f46d8daf7b03?x-oss-process=style/lg) Cash flow and capital investment of cloud providers in Q1 2026. Definitions of capital expenditure vary slightly among the three companies, as noted in the chart. This change has different implications for the industry side and the valuation side. Cloud providers have not cut AI budgets, so supply chain orders remain supported; however, capital expenditures alone are no longer sufficient to drive valuation increases. The market now demands that AI revenue, profits, and free cash flow cover new depreciation, power, and financing costs more quickly. **The core change in July was not the disappearance of AI demand, but rather the market raising the conditions for paying valuations for future growth.** For supply chain leaders, the logic of orders remains intact; for the secondary market, capital return rates have begun to become a new valuation constraint. ## **III. No Consistent Deterioration Yet in Core Supply Chains** ![AI硬件基本面仪表盘](https://pub.pbkrs.com/uploads/2026/37a09b27b6a673f7017d2ff2874649f1?x-oss-process=style/lg) As of early August 2026, advanced process nodes and HBM remain in phases of capacity expansion and technological iteration. ### **TSMC: Revenue and Profit Margins Remain High** TSMC reported second-quarter 2026 revenue of $40.2 billion, hitting the upper end of company guidance; gross margin was 67.7%, and operating margin was 60.3%. Third-quarter revenue guidance stands at $44.6–$45.8 billion, with gross margin guidance maintained at 65%–67%. The company also raised its 2026 revenue growth expectation to over 40% and increased annual capital expenditure guidance to $60–$64 billion. Short-term margin pressure mainly stems from initial depreciation upon N2 production launch and cost dilution from overseas wafer fabs. There is no sign of a significant decline in advanced process capacity utilization. The stock price adjustment occurred after upward revisions in growth expectations, making valuation compression a stronger explanation than order declines. ### **HBM: Long-term Contracts and Customer Bindings Remain Intact** Samsung has advanced HBM4 commercial shipments and expects HBM sales in 2026 to grow more than threefold compared to 2025. Citing management information, JPMorgan stated that 60%–70% of future DRAM and NAND capacity is covered by multi-year agreements, some of which include minimum price and prepayment arrangements. SK Hynix has also delivered 12-layer HBM4E samples to major customers. While HBM competition and capacity expansion are accelerating, its demand visibility remains significantly higher than that of traditional memory cycles. Long-term contracts, customer prepayments, and strict certification cycles cannot completely eliminate cyclical fluctuations, but they do reduce the probability of sudden order collapses. **As of early August, what can be confirmed is valuation compression, capital withdrawal, and deleveraging; it cannot yet be confirmed that AI hardware has entered a downward earnings cycle.** ## **IV. Subsequent Trends: Leader Recovery, Sector Divergence** The most intense passive selling pressure is nearing release completion, providing a technical basis for AI hardware recovery. The recovery pattern is unlikely to replicate the broad industry rally seen previously. The last round of gains was primarily driven by industrial beta; after July, order quality, customer binding, mass production yield rates, and cash flows will re-determine valuations. | **Asset Type** | **Judgment** | **Core Basis** | | ----------------------------------------------------------------- | --------------------- | ------------------------------------------------------------------------------------------------------- | | Leaders in Advanced Process Nodes, HBM, Advanced Packaging | **Continue to Hold** | High order visibility; customer barriers and supply constraints remain. | | Leading Companies in Optical Modules, PCBs, Equipment & Materials | **Selective Holding** | Demand direction holds; valuation, customer concentration, and cash flow determine recovery elasticity. | | Second/Tier-3 Thematic Assets Lacking Mass Production Orders | **Reduce Exposure** | Industry prosperity cannot cover company-level order and earnings risks. | Advanced process nodes, HBM, and advanced packaging possess stronger order and earnings visibility, making them the first choices for institutions to restore AI base positions after deleveraging ends. Demand directions for optical modules, PCBs, server components, and equipment materials remain valid; subsequent performance will depend more on customer concentration, expansion efficiency, and operating cash flow. For thematic companies lacking mass production orders and customer certifications, industry prosperity is no longer sufficient to provide valuation protection. The valuation premiums obtained through industry mapping before July may not fully recover. ## **Investment Judgment** The July decline was significant enough to materially alter portfolio experience, but insufficient on its own to prove the end of the AI hardware cycle. TSMC continues to provide high-growth guidance, HBM4 mass production continues, cloud providers are still expanding computing infrastructure, and earnings forecasts for Korean and Taiwanese markets continue to rise. The supply chain has not yet shown the two key turning signals: a reduction in capital expenditure or a downward revision in leader earnings. For investors holding core leaders, July mainly changed industry allocation, deleveraging operations, risk diversification, and short-term volatility, without altering the companies' order books and industrial positions. However, current requirements for valuation repair are higher: industry demand cannot replace company orders, product parameters cannot replace customer certifications, and profit growth cannot replace cash collection. **The industrial cycle continues, the broad rally phase has ended, and leader recovery takes priority.** The most reasonable strategy currently is not to exit AI hardware, but to reduce thematic exposure and increase the weight given to order fulfillment, earnings, and cash flow realization. **Source:** JPMorgan "Asia Pacific Monthly Review (July 2026)" and "Mainland China and Hong Kong Monthly Review (July 2026)"; disclosures from TSMC, Samsung Electronics, SK Hynix, Microsoft, Amazon, and Meta.**Disclaimer:** This article is for industry and company research discussion purposes only and does not constitute any investment advice. ### Related Stocks - [SSNGY.US](https://longbridge.com/en/quote/SSNGY.US.md) - [TSM.US](https://longbridge.com/en/quote/TSM.US.md) - [07709.HK](https://longbridge.com/en/quote/07709.HK.md) - [SKHY.US](https://longbridge.com/en/quote/SKHY.US.md) - [SKHYV.US](https://longbridge.com/en/quote/SKHYV.US.md) --- > **Disclaimer: This article is for reference only and does not constitute any investment advice.**