In a continuation of the ongoing selloff, stocks in the artificial intelligence (AI) sector, including industry giants Nvidia, Advanced Micro Devices (AMD), and Taiwan Semiconductor Manufacturing Co (TSM), have taken a hit. The decline has had a significant impact on semiconductor ETFs, such as VanEck and iShares, which have fallen approximately 12%. The downward trajectory of the AI stocks comes as Nvidia and Broadcom failed to meet the expectations of investors in their recent quarterly reports.

Broadcom Inc released its third-quarter earnings on Thursday, revealing a 42% increase in topline revenue to $13.07 billion. This exceeded the analyst estimate of $12.96 billion, and the chipmaker expects even higher fourth-quarter revenue at $14 billion, surpassing the analyst consensus of $12.70 billion. The adjusted gross margin also saw a sequential increase of 110 basis points (bps) and a year-on-year growth of 230 bps, reaching 77.4%.

JPMorgan analyst Harlan Sur projected upside potential for the industry, citing robust AI growth, momentum in VMware, and recovery in traditional semiconductor sectors. Meanwhile, Nvidia reported second-quarter revenue of $30.04 billion, a staggering 122% increase that exceeded the analyst estimate of $28.68 billion. The company expects third-quarter revenue between $31.85 billion and $33.15 billion, slightly surpassing the analyst consensus of $31.77 billion. However, the adjusted gross margin declined by 320 bps sequentially, despite a year-on-year growth of 450 bps.

BofA Securities analyst Vivek Arya remains optimistic about the industry, citing increased demand for data centers and AI training, as well as a recovery in the supply chain. However, the market sentiment remains bearish, with the VanEck Semiconductor ETF (SMH) losing 12% over the past five days. The SMH tracks the performance of the 25 largest U.S.-listed companies involved in semiconductor production, including Nvidia, Taiwan Semiconductor, Broadcom, and AMD. Similarly, the iShares Semiconductor ETF (SOXX) fell 12% during the same time frame, reflecting the broader decline in the sector.

Investors have demonstrated little faith in the sustained demand for AI, despite assurances from contract chipmakers like Taiwan Semiconductor and Samsung Electronics regarding the sector's future. The ProShares Ultra Semiconductors USD, which corresponds to two times the daily performance of the Dow Jones U.S. Semiconductors Index, experienced a significant loss of 26% over the past five days. Conversely, the ProShares UltraShort Semiconductors (SSG), which corresponds to two times the inverse performance of the same index, gained 28% during the same period.

It is worth noting that ETFs tracking broader indexes, such as the S&P 500 and NASDAQ, experienced relatively lesser losses due to the stability of Big Tech stocks like Apple, Amazon, and Microsoft. The SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 market index, registered a 3.5% loss over the past five days, while the Invesco QQQ Trust, Series 1 (QQQ), tracking the NASDAQ index, saw a 5% decline over the same period.

The AI sector selloff shows no signs of abating as key players in the industry struggle to meet investor expectations. The market will closely monitor future earnings reports and industry developments to determine whether this downturn will be temporary or indicative of a more significant trend.