High-Flying Chip Stocks Bear Brunt of Iran War Risk-Off Trade

Investors are bracing for an extended conflict in the Middle East by selling technology stocks, which had been among the market's strongest performers in recent months.

Memory chipmaker Micron Technology Inc. fell 9.9% on Monday. Among its peers, Samsung Electronics Co. dropped nearly 5%, while SK Hynix Inc. declined as much as 7.7% in early trading on the Korea Exchange Tuesday.

Uncertainty surrounding potential peace talks to end the conflict involving the US, Israel, and Iran is unsettling global markets, with signs of investor capitulation increasing. Technology shares, after years of gains driven by the artificial intelligence boom, are experiencing the sharpest declines.

According to Jim McCormick, chief global macro strategist at Citigroup Inc., the initial belief that tech stocks would be immune to geopolitical risks has proven incorrect. Markets have received a wake-up call as they face a scenario of sustained higher yields and elevated energy costs, which negatively impact the AI sector.

A Bloomberg index tracking semiconductor stocks has fallen more than 13% in March, heading for its worst monthly performance in three and a half years. Despite this, the gauge remains on track to close the quarter with a 10% gain.

Amid concerns about oil supply disruptions resulting from the Iran conflict, investors are shifting into more defensive stocks. The AI trade has become particularly vulnerable following its rapid rally, with additional worries over high spending levels and stretched valuations.

"Rising oil prices and ongoing interest rate volatility are driving a broader de-risking movement away from growth stocks and crowded trades like AI," stated Billy Leung, an investment strategist at Global X Management.

Memory stocks have been especially hard hit after substantial rallies fueled by rising product prices and strong demand. Shares of Kioxia Holdings Corp. fell more than 7% in Tokyo on Tuesday, though they remain up 82% for the year.

Investors have also been unsettled by news of a Google compression algorithm that some fear could reduce demand for memory chips, particularly longer-term storage products made by Kioxia and Sandisk Corp. Others have pointed to potential disruption from SK Hynix's planned US listing.

AI optimists maintain confidence that the hundreds of billions of dollars being invested in data centers by companies like Meta Platforms Inc. and Alphabet Inc. will drive sales and profits higher for chipmakers worldwide. Consumer demand is expected to further boost growth as AI technology becomes more mainstream.

The selloff in Micron, which has fallen 22% this month, is "potentially overdone," according to Anna Wu, a cross-asset strategist at VanEck Associates Corp. "Once markets move past the wartime panic and recognize how cheap the stock has become, I believe it can rebound significantly."