Author: Bu Shuqing
Plunging chip stocks, surging bond yields, and ongoing geopolitical conflicts—Wall Street's worry list keeps growing, yet the flow of funds tells a completely different story.
Last week, the S&P 500 hit a new all-time high, the Nasdaq 100 recorded its biggest weekly gain in two months, while high-yield bond funds attracted $4 billion in a single week, the highest inflow in two years, and Bitcoin ETFs saw a net inflow of $500 million over five trading days. Bank of America's Bull & Bear Index climbed to its highest level since 2021, indicating that market sentiment has turned decisively optimistic.
All this happened in the aftermath of the blow-up of AI hedge fund Situational Awareness—founded by the "Silicon Valley Stock God" Leopold Aschenbrenner. The event dragged the Philadelphia Semiconductor Index down 29% from its June high. However, instead of retreating, investors saw the turmoil as a buying signal, pouring more than $11 billion into semiconductor ETFs in just two trading days, subsequently sending those funds soaring.
Chip Plunge Becomes a Buy Signal
The blow-up of Situational Awareness was the most dramatic episode in recent markets. The struggles of this AI-themed hedge fund pulled the Philadelphia Semiconductor Index down 29% from its June peak, triggering sharp volatility in tech stocks.
But the market's reaction defied traditional risk-off logic. According to Bloomberg data, the triple-leveraged Direxion Daily Semiconductor Bull 3X ETF attracted over $2 billion in inflows in just two trading days, subsequently rallying more than 50% over seven sessions.
The two largest non-leveraged semiconductor funds together attracted over $7 billion during the same period, each rising about 16%.
Michael O'Rourke, Chief Market Strategist at JonesTrading, characterized this as a "tsunami" of momentum buying. "The Situational Awareness event created a tactical low for the AI trade, unleashing a massive wave of momentum-chasing behavior," he said. "However, it's worth noting that many investors still prefer concentration in mega-cap stocks, with the Magnificent Seven remaining the primary driver of index gains."
Risk Appetite Heats Up, From Retail to Institutions
What's driving the market isn't just the rebound in chip stocks, but a broad-based influx of funds across asset classes.
Citing Bank of America data, Bloomberg reported that high-yield bond funds saw a net inflow of $4 billion last week, the largest weekly amount in two years; Bitcoin ETFs recorded a net inflow of $500 million in the five trading days through last Thursday, despite Bitcoin's price having traded sideways in a narrow range for months. In the equity market, investors poured over $11 billion into leveraged and non-leveraged semiconductor ETFs combined last week.
Bank of America's Bull & Bear Index subsequently rose to its highest level since 2021. The team led by strategist Michael Hartnett noted that the equity rally has broadened beyond the core tech sector, with strong inflows into high-yield bonds and narrowing credit spreads supporting the optimistic sentiment.
Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, believes current market fears are overblown and the fundamentals for risk assets remain solid. He maintains an overweight position in U.S. stocks, focused on large-cap tech, while keeping a low allocation to fixed income but holding some longer duration and selective credit exposure. "Ultimately, economic growth is performing well," Melson said. "Sentiment and positioning can become overextended at times, but this excess heat is localized. Rotation helps digest some of the excess froth while maintaining support for the indices."
The Shadow of High Yields: Bond Market Pressure Lingers
The party in risk assets is not unfolding in a worry-free environment. Although the yield on the 30-year U.S. Treasury fell on four of the past five trading days, it remains near its highest levels in nearly two decades, presenting a persistent background pressure the market cannot ignore.
Analysts are divided on the causes of the elevated yields. Some blame the late-July surge on Fed Chair Kevin Warsh deliberately avoiding clear rate guidance, casting doubt on the central bank's resolve to fight inflation; others argue the bond market movement reflects investor confidence in sustained economic expansion.
Last Friday, data from the U.S. Labor Department showed American employers unexpectedly cut jobs in July, with previous months' figures also revised down. This surprisingly weak jobs report instead boosted stocks, pulling bond yields lower as markets bet the Fed would not be forced to hike rates in the near term.
Lindsay Rosner of Goldman Sachs Asset Management said that as data clarifies, oil prices stabilize, and the full economic picture becomes clearer along with returns on capital expenditure. "Putting together what we're seeing, the economy is still strong, the market is adapting to the current AI supply, and price discovery is happening about what's ahead," she said.
Ayako Yoshioka, Senior Investment Strategist at Wealth Enhancement, cautioned that semiconductors remain the core of AI infrastructure buildout, but as the process advances, bottlenecks could shift towards electricity supply shortages. "Higher yields remain a risk—especially as AI infrastructure construction continues to knock on the bond market's door," she said.
Brief Pullbacks Repeatedly Reinforce Bullish Conviction
Supporting the current market sentiment is a repeatedly proven investor psychology—every pullback is short-lived, every panic is a buying opportunity.
Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, noted that price corrections have proven time and again to be fleeting, constantly reinforcing investors' psychological fortitude. Those who chose to exit at times of highest uncertainty have paid a price, as the biggest gains often occur precisely during the market's most turbulent moments.
"There still isn't a compelling alternative," Thooft said. "Cash may feel safe, but over the long term, it struggles to outpace inflation and earnings growth akin to stocks. As for bonds, we believe the term premium is still underestimated. Over the past decade, investors who kept waiting for a better entry point have largely been left behind by the market."
The Cboe Semiconductor ETF Volatility Index fell nearly 9 points this week, marking its biggest weekly decline this year, vividly illustrating the rapid repair in market sentiment. Although the worry list continues to lengthen, the direction of the money flow still clearly points toward risk assets.
