A deep selloff in chip stocks did not trigger a broader retreat from risk. Last week, the S&P 500 closed at a record high and the Nasdaq 100 logged its biggest weekly gain in two months, while high-yield bond funds pulled in $4 billion, their largest weekly inflow in two years. Spot Bitcoin ETFs also added $500 million over the five trading days through last Thursday.
Bank of America’s bull-and-bear indicator rose to its highest level since 2021, a sign that sentiment has turned sharply more constructive. The move followed the blowup at Situational Awareness, an AI-focused hedge fund founded by Leopold Aschenbrenner, who was described in the source as a “Silicon Valley stock god.” The episode briefly knocked the Philadelphia Semiconductor Index 29% below its June peak. Instead of stepping back, investors moved in fast, sending more than $11 billion into semiconductor ETFs in two trading days before those funds surged.
Chip-stock slump turned into a buying signal
The Situational Awareness blowup became one of the market’s most dramatic moments in recent weeks. Stress at the AI-themed hedge fund pushed the Philadelphia Semiconductor Index sharply lower from its June high and set off heavy volatility across tech shares.
Yet the response ran against the usual flight-to-safety pattern. Bloomberg data showed that the Direxion Daily Semiconductor Bull 3X ETF drew more than $2 billion in just two trading days. Over the next seven trading days, the fund gained more than 50%.
The two largest unlevered semiconductor funds took in more than $7 billion combined over the same period, and each rose about 16%. Michael O'Rourke, chief market strategist at JonesTrading, described the move as a “tidal wave” of momentum buying. “The Situational Awareness event created a temporary low in the AI trade, which unleashed large-scale momentum chasing,” he said.
O'Rourke also said many investors were still concentrating on mega-cap names, with the “Magnificent Seven” remaining the main force behind index gains.
Risk appetite broadened across stocks, credit and crypto
The rebound in semiconductor shares was only part of the story. Money moved into multiple risk assets at the same time.
Citing Bank of America data, Bloomberg reported that high-yield bond funds recorded $4 billion in net inflows last week, the biggest weekly intake in two years. Spot Bitcoin ETFs brought in $500 million over the five trading days through last Thursday even though Bitcoin had traded in a narrow range for months. In equities, investors put more than $11 billion into leveraged and unlevered semiconductor ETFs over the week.
That wave of inflows helped lift Bank of America’s bull-and-bear indicator to its highest level since 2021. A team led by strategist Michael Hartnett said the rally in equities had spread beyond the tech core, while strong inflows into high-yield debt and tighter credit spreads reinforced the market’s optimistic tone.
Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said the market’s worries were being overstated and that the underlying picture for risk assets remained solid. He kept an overweight stance on U.S. equities, focused on large-cap technology stocks, while staying underweight fixed income overall, with some longer-duration exposure and selective credit positions.
“At the end of the day, growth is holding up well,” Melson said. “Sentiment and positioning can get stretched, but that overheating is localized. Rotation helps work off excess froth while keeping support under the indexes.”
Treasury yields still cast a shadow over the market
The rally in risk assets has not unfolded in a stress-free backdrop. The yield on the 30-year U.S. Treasury fell on four of the past five trading days, but it remained near the highest levels seen in roughly two decades.
Views differ on why yields have stayed so high. Some analysts tied the late-July surge to Federal Reserve Chair Kevin Warsh avoiding clear rate guidance, which raised doubts in the market about his anti-inflation resolve. Others saw the move in bonds as a reflection of investor confidence in continued economic expansion.
On Friday, the U.S. Labor Department reported that employers unexpectedly cut jobs in July, while data for the prior two months was revised lower. The weaker-than-expected employment report lifted stocks and pulled bond yields down, as traders bet the Fed would not be forced into a near-term rate increase.
Lindsay Rosner of Goldman Sachs Asset Management said the broader economic picture and returns on capital spending were becoming clearer as data firmed up and oil prices stabilized. “Taken together, the economy remains strong, the market is gradually adjusting to current AI supply, and price discovery is underway for what comes next,” she said.
Ayako Yoshioka, senior investment strategist at Wealth Enhancement, said semiconductors remain central to AI infrastructure buildout, but bottlenecks could shift toward shortages in power supply as that buildout continues. “Higher yields remain a risk — especially as AI infrastructure spending keeps knocking on the bond market’s door,” she said.
Short pullbacks have kept reinforcing bullish conviction
One more force has been supporting sentiment: the repeated belief that every selloff is brief and every spike in fear can be bought.
Nathan Thooft, senior portfolio manager at Manulife Investment Management, said price corrections have repeatedly proved short-lived, reinforcing investor confidence each time. Those who exited at peak uncertainty often paid the price, because the strongest gains frequently arrived during the market’s most volatile stretches.
“There still isn’t a compelling alternative,” Thooft said. “Cash may feel safe, but over time it struggles to beat inflation and equity-like earnings growth. As for bonds, we think term premium is still underestimated. Over the past decade, many investors waiting for a better entry point have simply been left behind.”
The Cboe Semiconductor ETF Volatility Index fell by nearly 9 points this week, its biggest weekly drop of the year, offering a direct read on how quickly sentiment repaired itself. The list of worries may still be growing, but capital flows are still pointing toward risk assets.