These 3 AI ETFs Could Be the First to Kill the Stock Market Rally

The AI-driven rally has reached a fever pitch, but a look under the hood of three primary ETFs, the iShares Semiconductor ETF (SOXX), the iShares Top 20 U.S. Stocks ETF (TOPT), and the U.S. Digital Infrastructure and Real Estate ETF (IDGT), reveals a market that is fundamentally overextended and structurally vulnerable.

While momentum remains strong, these three ETFs exhibit charts that I simply label as “stretched.” That is, they have moved up so far, so fast, that the laws of gravity are as big a risk as some out-of-left field news event.

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The lesson of 2000 and the dot-com bubble is that you never know how high a momentum-driven, narrow rally can go. But we can know when risk is at least competitive with the potential for continued reward. These charts suggest they will be the first to break when the current wave of euphoria finally hits a wall.

Here’s a summary of the trio. They are all up smartly this year and over the past 12 months.

SOXX

SOXX is the clearest example of a parabolic move that has detached itself from historical norms. The semiconductor space is no longer trading on cyclical fundamentals. It is trading on pure AI mania.

With a trailing price-earnings (P/E) ratio of 51x, the sector is priced for a level of perfection that rarely exists in the notoriously cyclical chip industry. When the semiconductor cycle eventually turns, or when the massive capital expenditure budgets for AI chips begin to rationalize, SOXX will likely be the primary engine of the downward wave.

When I see a stock or ETF do what SOXX just did (circled in purple above), all I think about is the Empire State Building, narrowing with a needle at the very top. Just as that skyscraper shoots up to a very sharp point, as does the SOXX chart, it comes right back down on the other side.

TOPT

Speaking of really big things, this ETF owns the 20 largest S&P 500 Index ($SPX) stocks. And if any ETF summarizes the extreme nature of the rally we’re in right now, it is this one. TOPT represents nearly 50% of the entire S&P 500. Think about that. 500 stocks, but 480 of them combine to be just a bit higher market cap than the other 20. That’s what I call a K-shaped market. Or maybe better said, an “i-shaped market.”