What Happened?

A number of stocks fell in the afternoon session after TSMC paired topline strength with a free cash flow-compressing capital expenditure reset, compounding a sector-wide selloff that began with ASML the day before. TSMC shares fell roughly 4% in the morning session despite a record profit beat. 

The company raised its full-year 2026 revenue growth outlook to slightly above 40%, but simultaneously increased its capital expenditure guidance to $60–$64 billion, up from a prior ceiling of $56 billion. Management also guided third-quarter operating margins roughly 70 basis points below consensus and warned that overseas expansion and 2-nanometer ramp costs would dilute gross margins in the second half of the year. The market continued to price the semiconductor sector on top-line artificial intelligence demand, which TSMC confirmed remains "extremely robust." However, the capex reset shifts investor focus to cash generation and the explicit cost of staying at the leading edge. Every incremental dollar of TSMC's capex increase could be a drain on near-term free cash flow, compressing the yields needed to justify the sector's lofty valuation multiples. This explains why the broader group sold off despite objectively strong revenue metrics from both TSMC and ASML this week. The read-through for the sector is that scaling AI manufacturing capacity will be exceptionally expensive, forcing a multiple de-rating as profit margins absorb the burden of rapid expansion. The market will now watch upcoming earnings from major hyperscalers to see if downstream software monetization can ultimately justify the massive capital costs flowing through the hardware supply chain.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.

Among others, the following stocks were impacted:

• Memory Semiconductors company Western Digital (NASDAQ: WDC) fell 8.8%. Is now the time to buy Western Digital? Access our full analysis report here, it’s free.
• Analog Semiconductors company Vishay Intertechnology (NYSE: VSH) fell 8.5%. Is now the time to buy Vishay Intertechnology? Access our full analysis report here, it’s free.

Zooming In On Western Digital (WDC)

Western Digital’s shares are extremely volatile and have had 62 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 3 days ago when the stock dropped 6.6% on the news that investors took profits following the chip sector's strong rally in the first half of the year as Middle East tensions escalated. SK Hynix shares fell over 5% in South Korea following its strong Nasdaq debut the previous week. 

The selloff dragged down memory peers like Micron Technology and SanDisk Adding to the weakness for memory stocks, a South Korean brokerage lowered its second-quarter earnings forecast for SK Hynix. Brokerage firm KIS projected SK Hynix's second-quarter operating profit at 60.4 trillion won, roughly 8% below the 65 trillion won market consensus. The expected miss stems from the company's heavy reliance on long-term contracts for its premium High Bandwidth Memory (HBM) chips, a structure that effectively locked the manufacturer out of recent 30% to 50% price surges in the broader spot market. It is natural to assume that selling more premium AI chips would immediately expand profit margins. However, HBM economics work differently than standard memory. Because these advanced chips require massive upfront capital, they are typically sold through multi-year agreements that fix the price. Standard DRAM and NAND chips, by contrast, trade on the spot market where prices move freely. 

Consequently, SK Hynix's heavy exposure to premium, fixed-price contracts placed a near-term ceiling on its pricing power even as broader market prices spiked. This revelation triggered a reassessment across a memory sector priced for perfection, accelerating profit-taking among investors who were already questioning the durability of AI capital spending. Adding to the defensive positioning, renewed tensions in the Middle East, including reports of US military action against Iran, pushed oil higher and encouraged a shift toward safer assets.

Western Digital is up 144% since the beginning of the year, but at $458.28 per share, it is still trading 29.7% below its 52-week high of $651.88 from June 2026. Investors who bought $1,000 worth of Western Digital’s shares 5 years ago would now be looking at an investment worth $7,138.

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