Author: Claude, Deep Tide TechFlow

Deep Tide Introduction: The semiconductor ETF (SOXX) has surged 78.5% year-to-date, while the software ETF (IGV) has fallen 12.5% during the same period, creating a return gap of over 90 percentage points, reaching historical extreme levels.

SanDisk leads the S&P 500 with a 426% increase this year, Intel triples, Micron rises 154%, while Microsoft, Adobe, and Salesforce have all seen declines exceeding 17% this year. The combined capital expenditure of the four major hyperscale computing companies approaches $700 billion in 2026, with funds pouring into the chip industry like a black hole, while the software sector faces a dual squeeze from AI replacement narratives and capital withdrawal.

Recently, a hot post in the investment section of the overseas Reddit forum stated that semiconductor stocks "are basically a black hole, sucking everything else in," resonating with many.

Data confirms this intuition. As of May 22, the iShares Semiconductor ETF (SOXX) tracking the semiconductor sector has a year-to-date return of 78.5%, while the iShares Expanded Tech-Software ETF (IGV) tracking the software sector has a return of -12.5%. The return gap between these two ETFs, which both belong to the tech category, exceeds 90 percentage points this year.

According to Tickeron statistics, all software stocks in the S&P 500 are currently below the 200-day moving average, while approximately 89% of semiconductor stocks remain above the 200-day average. The two sectors dropped to the zero axis simultaneously during the 2022 bear market and have since completely diverged in their trends. This division is not gradual but explosive.

SanDisk up 426%, leading S&P 500, Intel triples crushing AMD

The numbers 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 in 2026, skyrocketing again after having soared 559% in 2025. This storage chip company, spun off from Western Digital, saw NAND flash prices rise over 200% year-on-year due to AI demand, with Q1 revenues increasing 250% to $5.95 billion, and a non-GAAP gross margin reaching 78.4%.

According to 24/7 Wall Street, Intel (INTC) has risen approximately 222% to 225% year-to-date, double that of AMD's increase. Intel's rebound comes from an extremely low base, combined with progress in the 18A process node, rumors of Apple contract orders, and yield improvement data disclosed by CEO Pat Gelsinger in a CNBC interview. Short sellers have been severely crushed; according to S3 Partners data, Intel's market capitalization has increased by over $440 billion since its low on March 30, with short sellers' 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. Earnings reports also support this upward trend, with Q2 revenues for the 2026 fiscal year reaching $23.9 billion, a year-on-year increase of 196%, and adjusted earnings per share of $12.20, far exceeding market expectations of $9.21. DRAM accounts for 79% of total revenue, with high bandwidth memory (HBM) being the core driver. SK Hynix Chairman Chey Tae-won even predicts that the shortage of storage chips may last until 2030.

In contrast, NVIDIA (NVDA), the real "money printer" for AI computing, has seen a year-to-date increase of only about 8% to 15%, performing far worse than the aforementioned second-tier semiconductor companies. According to The Motley Fool, NVIDIA's current forward price-earnings ratio is about 21.5 times, nearly on par with the S&P 500's 20.3 times. This means the market is no longer willing to pay a growth premium for NVIDIA, and funds are instead flowing into lower-valued and more flexible chip companies.

$700 billion capex: Hyperscale computing companies' "arms race"

The surge in semiconductors is backed by real money.

According to data compiled by the Financial Times and several other institutions, the four major hyperscale computing companies—Microsoft, Google parent Alphabet, Amazon, and Meta—are expected to have total capital expenditures in 2026 between $650 billion and $725 billion, nearly doubling from about $410 billion in 2025. This represents the largest concentrated infrastructure investment cycle in tech history.

According to Tom's Hardware, Jefferies analyst Brent Thill remarked, "The AI economy is healthy. Bearish arguments are garbage."

Specifically, Amazon leads with quarterly capital expenditures of $44.2 billion, with AWS growing 28%; Alphabet's capital expenditures in Q1 were $35.67 billion, doubling year-on-year, with Google Cloud backlog orders soaring to over $460 billion; Microsoft's capital expenditures for the 2026 calendar year will reach $190 billion, of which about $25 billion comes from price increases in storage 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 reported significant non-cash investment gains in Q1 earnings: Alphabet recorded $36.8 billion (mainly from equity appreciation in Anthropic), Amazon recorded $16.8 billion, and Microsoft recorded $5.9 billion (from OpenAI). Although capital expenditures are burning through cash rapidly, AI investment targets are also continuously appreciating.

Software stocks face a dual squeeze from AI replacement narratives, IGV records the worst drop since 2008

The flip side of the coin is the brutal collapse of software stocks.

According to The Motley Fool, after Anthropic released Claude Code in early 2026, the software sector experienced significant declines—the market's logic is not to reward AI innovation but to punish those SaaS companies that may be replaced by AI. The IGV once recorded its largest drop since 2008.

As of late May, Microsoft has dropped approximately 17% year-to-date, Adobe has fallen about 32%, Salesforce is down around 31%, and Shopify has lost about 26%. The S&P 500 Software and Services Index is about 21% below its 200-day moving average, the largest deviation since June 2022. According to Goldman Sachs and other institutional data, short positions in mid-to-large software companies have surged sharply over the past three months, with cybersecurity and SaaS companies being the areas most heavily targeted by shorts.

This divergence is underpinned by two layers of logic. The first layer is direct capital siphoning: market liquidity is limited, and when $700 billion in capital expenditures push chip stocks into a parabolic rise, funds must be withdrawn from certain places. The author of that Reddit post stated, "Well-positioned software companies see their stock prices stagnate or decline while the semiconductor index rises vertically."

The second layer is the reconstruction of valuation narratives. The rapid evolution of AI entities has led the market to reassess the moat of the SaaS business model: when AI can automate programming, form-filling, and customer service, how long can the subscription model based on seat fees last? The Motley Fool pointed out that software companies that can survive need to possess features that are difficult for AI to replace, such as real data, proprietary workflows, and deep customer integration.

Cycle peak or structural change? Two key questions remain unanswered

The Reddit user posed two questions at the end of the post, representing investors' ultimate doubts about whether the semiconductor sector can remain hot.

However, these two questions remain unanswered to date.

First: How long can the capital expenditures of hyperscale computing companies be sustained?

According to CNBC, Pivotal Research expects Alphabet's free cash flow in 2026 to plummet by nearly 90% from $73.3 billion in 2025 to $8.2 billion. Of Microsoft's total capital expenditure of $190 billion for the year, $25 billion is consumed by price increases in storage chips and components. These companies are wagering future profits on an AI revenue that has yet to fully materialize.

Second: Is software the next rotation direction?

According to Bank of America chief investment officer Hartnett's judgment in a previous Flow Show report, software is one of the best contrarian longs for the second quarter of 2026, as the sector's deviation from the 50-day and 200-day moving averages has become extreme.

However, this does not mean that the semiconductor rally has ended. The Philadelphia Semiconductor Index (SOX) recorded an all-time record of 18 consecutive trading days of gains on April 25, with an increase of about 45% during that time. According to Intellectia analysis, some seasoned analysts have begun to compare the current trend to the internet bubble of 1999 to 2000, warning of a potential 25% to 30% correction. But the SOX has won 22 out of the last 23 trading days, setting 15 intraday all-time highs, and this momentum itself is a signal.

As that Reddit user said, "I don’t want to call a top because I’ve been burned too many times by calling tops before. But the concentration of earnings in a single sector is starting to give off the smell of late-cycle."