Thursday marked a difficult day for much of the technology sector, particularly semiconductors. The popular Philadelphia Semiconductor Index (SOX) fell 350 basis points, with well-known and favored stocks down 4-6% with no major events.

“No incremental and new negative news flow or data points on the fundamental side of the equation to create a rush for the exits,” Mizuho analysts commented.

“That’s the good part,” they added.

Mizuho believes the market saw a switch to rate-sensitive winners as a lower consumer price index (CPI) report fueled speculation that the Federal Reserve may cut interest rates as early as September.

While active fund managers may not have rushed to sell Big Cap Tech and Semiconductor winners to invest in housing, biotech, utilities, real estate, small-cap and REIT stocks, quantitative and passive strategies likely did.

The biggest question looming now, according to Mizuho analysts, is the impact of the upcoming PPI data release at 8:30am. ET. If it’s weaker, it can cause further spin from semiconductors and technology.

Analysts believe Thursday’s sell-off was a “wake-up call,” signaling that it may be time to start taking profits on major winners in semiconductor technology and AI. Last week saw significant gains in these stocks with no new developments.

“It just didn’t look healthy to me as valuations are only rising ahead of earnings season coming up on July 2nd. The big and quick switch from Software to Semis this week only made yesterday more painful,” the analysts continued .

The broader sell-off and switching of semiconductors yesterday could be a preview of what’s to come when Nvidia (NASDAQ: ) finally guides only “embedded” or misses expectations.

“Yes, that day will happen eventually. Trust me on this. No idea how soon and in which quarter. Not likely in CY24, or even early CY25 in my view,” Mizuho analysts added.

“But it’s happening, and the broad selling and switching OUT OF SEMIS yesterday was a quick preview. Think “there’s no place to hide” when a lull starts. All semi-finals will go lower.”

The collapse of semiconductor equipment stocks such as Applied Materials (NASDAQ: ), KLA Corp (KLAC ) and Lam Research (NASDAQ: ), which fell 450-600 basis points without recovering, exemplifies the potential for an eventual relaxation of the semiconductor market.

Those stocks, which are largely owned by baskets of AI winners and general non-tech investors who see them as “AI options and extension shovels,” quickly sold off.

“So when these funds or momentum strategies see a potential crash or switch, they sell first and ask questions later,” Mizuho analysts noted.

They hypothesize that the NVDA and AI semiconductor slowdown may come as the big cloud hyperscalers discuss moderating their capital investment growth rather than cutting it. While they don’t foresee this happening until CY25, they warn that if investors start to worry that calendar years 2025 or 2026 could represent a near-term peak, many will likely sell before real signals emerge.