A Hot July but Cold Chips: AI Trades Suffered the Most Significant Pullback of the Year

Overview

This report is Deutsche Bank's DB Chart of the Day from its Cross-Discipline Thematic Research series, focusing on the performance of major global assets in July 2026 and year to date. The core observation is that July was not simply a broad-based decline in risk assets, but rather a sharp stress test of the year's most crowded trades. AI and semiconductor trades cooled significantly, while South Korean and Asian markets came under pressure. At the same time, oil prices once again became a macro shock due to geopolitical risks, long-end yields rose to multi-year highs, and foreign exchange markets regained attention amid renewed focus on yen intervention.

Core views

The report argues that the strongest trades earlier in 2026 showed signs of vulnerability in July. Semiconductors and South Korean equities pulled back sharply from their highs, reflecting a renewed market reassessment of AI valuations, Chinese AI competition, capital-spending intensity, and supply constraints. Nevertheless, year-to-date performance still shows that these assets have not lost their lead. In contrast to the pressure on the Asian technology chain, European equities were more resilient, while oil and some commodities were July winners and bond markets came under pressure from reflation concerns and rising long-end yields.

Analysis framework

The report uses a cross-asset monthly performance review framework, comparing July returns with year-to-date 2026 returns. It compares dollar-denominated performance across equity indexes, commodities, bonds, and foreign exchange, and explains asset rotation through geopolitics, PMIs, central-bank policy, corporate earnings, and changes in market positioning.

Methodology notes

• Cross-asset performance reviewJuly and YTD Returns for Selected Global Assets

  Comparison of monthly and year-to-date returns

  Comparing July monthly performance with year-to-date performance distinguishes short-term pullbacks, trend reversals, and stress tests of crowded trades in strong-performing assets.

• Macro thematic analysisAI trade stress test

  AI trade stress test

  The market impact of the AI theme's shift from extreme strength to a temporary pullback is measured through the performance of the semiconductor index, KOSPI, Nasdaq, and the Magnificent 7.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Philadelphia Semiconductor Index

  Core representative asset for AI and semiconductor trades

  Strengths

  Still up 60.2% year to date, maintaining its position among the leading major assets.

  Weaknesses

  Fell 20.6% in July, indicating a concentrated release of concerns over valuations, competition, capital spending, and supply constraints.

  Comparison

  Its July pullback was more severe than that of the S&P 500 and European equity indexes, but it remained significantly ahead year to date.

  Risks

  Crowded AI trades, valuation correction, Chinese AI competition, capital-spending intensity, and supply-chain constraints.

• KOSPI

  Representative market for Asian technology and the semiconductor cycle

  Strengths

  Up 58.1% year to date in U.S. dollar terms, it remained among the top-performing markets in 2026.

  Weaknesses

  Fell 16.3% in U.S. dollar terms and 22.2% in local-currency terms in July.

  Comparison

  Along with the Philadelphia Semiconductor Index, it was among the previous winners with the largest July pullbacks.

  Risks

  Semiconductor-cycle pullback, declining Asian risk appetite, and foreign exchange volatility.

• Brent crude

  Dominant macro shock asset in July

  Strengths

  Rose 23.6% in July and 48.1% year to date.

  Weaknesses

  High oil prices could exacerbate inflation and growth pressures.

  Comparison

  It significantly outperformed equities and bonds in July, becoming a winner while most risk assets came under pressure.

  Risks

  U.S.-Iran relations, disruptions around the Strait of Hormuz, and rapid changes in the geopolitical premium.

• STOXX 600

  Representative European equity market

  Strengths

  Rose 2.2% in July and 10.3% year to date, showing greater resilience than U.S. and most Asian markets.

  Weaknesses

  It remained exposed to global growth, oil prices, and political risks.

  Comparison

  It outperformed the Nasdaq and most Asian equity indexes in July.

  Risks

  Slowing eurozone growth, energy-price volatility, and renewed political risks.

• Global bonds

  Asset class affected by oil prices and reflationary pressures

  Strengths

  Major central banks kept policy rates unchanged in July, providing some anchoring for the short end.

  Weaknesses

  Long-end yields rose to multi-year highs, weighing on government-bond total returns.

  Comparison

  They underperformed commodities and some equity markets in July.

  Risks

  Higher inflation, fiscal financing needs, oil-price shocks, and currency depreciation pressures.

Key data

• Philadelphia Semiconductor Index July return-20.6%The report describes this as its worst monthly performance since 2008.
• Philadelphia Semiconductor Index YTD return+60.2%Despite the sharp July decline, it remained the strongest major asset in the sample year to date.
• KOSPI July return-16.3% USD; -22.2% local FXIt fell sharply in July but remained among the year-to-date leaders.
• KOSPI YTD return+58.1%At its June peak, its gain in U.S. dollar terms had briefly exceeded 100%.
• S&P 500 July return-0.1%It significantly outperformed the Nasdaq.
• Nasdaq July return-3.2%It was affected by the pullback in AI and the technology chain.
• Magnificent 7 July return+2.1%It was supported by month-end earnings and a rebound in AI-related stocks.
• STOXX 600 July return+2.2%European equities were more resilient than U.S. equities and most Asian markets.
• FTSE 100 July return+5.3%Its year-to-date return reached +11.5%.
• Brent July return+23.6%Driven by renewed escalation in tensions between the United States and Iran, it became the best-performing major asset in July.
• WTI July return+21.8%It was up +47.5% year to date.
• U.S. Treasury July total return-1.2%Rising oil prices and reflation concerns pushed long-end yields higher.
• Yen event2026-07-30 interventionAfter coordinated intervention by Japan and the United States, the yen rebounded from levels near its weakest point against the U.S. dollar since 1986.

Impact & implications

For investors, July highlighted the need to reassess valuation and positioning risks in crowded AI trades, while monitoring the transmission of higher oil prices to inflation, bond yields, and risk-asset valuations. The report did not declare a complete reversal of the year-to-date trend; rather, it emphasized that previous winners remained strong, but volatility and vulnerability had risen significantly.

Risks

• Further declines caused by excessive valuations and crowded positioning in AI-related assets.
• Continued geopolitical increases in oil prices, driving inflation and long-end yields higher.
• Further pressure on global bonds amid reflation and fiscal stress.
• A return of China's PMI to contraction and concerns over domestic demand could weigh on Asian risk assets.
• Foreign exchange intervention and currency volatility could alter dollar-denominated cross-market returns.

What to watch

• Subsequent earnings, capital-spending guidance, and changes in supply-chain constraints at AI-related companies.
• Whether the Philadelphia Semiconductor Index and KOSPI can maintain their year-to-date lead.
• Whether Brent and WTI continue to be driven higher by U.S.-Iran developments.
• Policy comments from major central banks following rising oil prices and long-end yields.
• The yen's trajectory and whether further foreign exchange intervention occurs.
• Whether the relative resilience of European equities can continue.