Article by Bu Shuqing
Chip stocks plummet, bond yields surge, and geopolitical tensions persist—Wall Street’s list of concerns keeps growing, but capital flows tell a very different story.
Last week, the S&P 500 reached a new all-time high, the Nasdaq 100 posted its largest weekly gain in two months, high-yield bond funds attracted $4 billion in net inflows—the highest in two years—and Bitcoin ETFs saw a net inflow of $500 million over five trading days. Bank of America’s Bull-Bear Index rose to its highest level since 2021, signaling a broad shift in market sentiment toward optimism.
All of this occurred after the collapse of the AI hedge fund Situational Awareness, founded by “Silicon Valley’s Warren Buffett,” Leopold Aschenbrenner—a event that initially pulled the Philadelphia Semiconductor Index down 29% from its June high. However, rather than retreating, investors viewed the turmoil as a buying opportunity, injecting over $11 billion into semiconductor ETFs within just two trading days, followed by a sharp rally in related funds.
Chip stocks' sharp decline becomes a buying opportunity
The liquidation event involving Situational Awareness was one of the most dramatic episodes in recent markets. The hedge fund’s struggles, centered on AI-themed positions,一度 pushed the Philadelphia Semiconductor Index down 29% from its June high, triggering sharp volatility in technology stocks.
However, market reactions have defied traditional safe-haven logic. According to Bloomberg data, the Direxion Daily Semiconductor Bull 3X ETF, which offers three times leveraged exposure to semiconductor stocks, attracted over $2 billion in inflows within just two trading days, followed by a cumulative gain of more than 50% over the next seven trading days.
The two largest non-leveraged semiconductor funds collectively attracted over $7 billion in the same period, each rising approximately 16%.
JonesTrading’s Chief Market Strategist, Michael O'Rourke, characterized this as a "tsunami" of momentum buying. "The Situational Awareness event created a temporary low in AI trading, unleashing massive momentum-driven buying," he said, "however, it is noteworthy that many investors still tend to concentrate on mega-cap stocks, with the Magnificent Seven remaining the primary driver of index gains."
Risk appetite is rising across the board, from retail to institutional investors.
The market is being driven not only by a rebound in chip stocks but also by broad-based capital inflows across asset classes.
According to Bloomberg, citing Bank of America data, high-yield bond funds saw net inflows of $4 billion last week, the largest weekly inflow in two years; Bitcoin ETFs recorded net inflows of $500 million over the five trading days through last Thursday, despite Bitcoin’s price having traded in a narrow range for months. In the stock market, investors poured over $11 billion into both leveraged and non-leveraged ETFs linked to semiconductors last week.
The Bank of America Bull & Bear Index rose to its highest level since 2021. A team led by strategist Michael Hartnett noted that the stock market rally has expanded beyond tech-centric sectors, supported by strong inflows into high-yield bonds and narrowing credit spreads, which together underpin this optimism.
Garrett Melson, Portfolio Strategy Analyst at Natixis Investment Managers Solutions, believes that current market concerns have been overblown and that the fundamentals of risk assets remain solid. He maintains an overweight position in U.S. equities, with a focus on large-cap technology stocks, while keeping a underweight stance on fixed income, albeit with selective credit exposure and moderate allocation to longer-duration securities. "Ultimately, economic growth is performing well," Melson said. "Sentiment and positioning can sometimes stretch too far, but this overheating is localized; rotation has helped absorb excess bubbles while maintaining support for indices."
The Shadow of High Yields: Bond Market Pressure Has Not Yet Dissipated
The rally in risk assets is not taking place in a risk-free environment. Although the yield on 30-year U.S. Treasury bonds has declined in four of the past five trading days, it remains near its highest level in nearly two decades, exerting significant underlying pressure on the market.
Analysts disagree on the causes of the elevated yields. Some attribute the sharp rise in yields at the end of July to Federal Reserve Chairman Kevin Warsh’s deliberate avoidance of clear interest rate guidance, which fueled market doubts about his commitment to fighting inflation; others believe the bond market’s movement reflects investors’ confidence in sustained economic expansion.
Last Friday, data released by the U.S. Department of Labor showed that U.S. employers unexpectedly cut jobs in July, with data for the prior two months also revised downward. This unexpectedly weak jobs report boosted stock markets, causing bond yields to decline, as investors bet that the Federal Reserve would not be forced to raise rates in the near term.
Lindsay Rosner of Goldman Sachs Asset Management said that as data becomes clearer and oil prices stabilize, the overall economic picture and the return on capital expenditures are becoming more transparent. “Taken together, we see that the economy remains strong, and markets are gradually adapting to the current supply of AI and pricing in future developments,” she said.
Wealth Enhancement Senior Investment Strategist Ayako Yoshioka noted that semiconductors remain at the core of AI infrastructure development, but as the process advances, bottlenecks may shift toward power supply shortages. "Higher yields remain a risk—especially as AI infrastructure development continues to knock on the doors of the bond market," she said.
Brief pullbacks repeatedly reinforce bullish confidence.
Another repeatedly validated investor psychology underpinning current market sentiment is that every pullback is temporary, and every panic is a buying opportunity.
Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, noted that price corrections have repeatedly proven to be fleeting, continually reinforcing investors’ psychological resilience. Those who chose to exit during periods of highest uncertainty paid the price, as the largest gains often occur precisely during times of market volatility.
"There are still no compelling alternatives," Thooft said. "Cash may feel safe, but over the long term, it struggles to outpace inflation and equity-like profit growth. As for bonds, we believe the term premium remains undervalued. Investors who have been waiting for a better entry point over the past decade have largely been left behind by the market."
The Cboe Semiconductor ETF Volatility Index fell nearly 9 points this week, marking the largest single-week decline this year, clearly reflecting the rapid recovery in market sentiment. Although concerns continue to mount, the flow of capital still clearly favors risk assets.