Nvidia and the Semiconductor Sector: Is the AI-Driven Bull Market Sustained or Overdue for a Correction?

The semiconductor sector has become the beating heart of the artificial intelligence (AI) revolution, with companies like Nvidia and TSMC leading the charge. In Q2 2025, both firms delivered record results, driven by surging demand for AI chips. TSMC's net income soared by 61% year-on-year, with AI-related revenue accounting for 60% of its total sales, while Nvidia's AI-driven data center revenue hit $39 billion, or 89% of total revenue. These figures underscore a sector in hypergrowth. But as technical indicators and intermarket divergences grow more pronounced, investors must ask: Is this bull market built to last, or are cracks beginning to form?

Fundamentals: AI Demand Is Still the Engine

The AI infrastructure boom shows no signs of slowing. TSMC's CEO, C.C. Wei, explicitly tied its record profits to "robust AI and HPC-related demand", with its 7-nanometer and smaller chips accounting for 74% of wafer sales. These chips are critical for training large language models and powering data centers, and their demand is being fueled by Meta, Microsoft, Amazon, and Google, which have all announced $60B–$100B in 2025 capex for AI expansion.

Nvidia, the poster child of the AI revolution, is also benefiting from a unique flywheel. Its Blackwell and Hopper GPUs are the industry standard for AI training, and even after a $4.5B export charge for Chinese H20 chips, its Q2 2025 guidance of $45B signals 50% year-on-year growth. The company's pipeline of AI-related investments now exceeds $1.5 trillion, a testament to the depth of institutional demand.

Technical Warning Signs: Overbought Conditions and Divergences

Despite the fundamentals, technical indicators suggest caution. Nvidia's stock closed at $172.41 on June 19, 2025, with a 14-day RSI of 78.29, well into overbought territory. This is compounded by a Golden Cross (50-day MA crossing above 200-day MA) and a MACD reading of 7.98, indicating strong bullish momentum. However, overbought conditions often precede corrections, especially when fundamentals don't justify extreme valuations.

The SOXX Semiconductor Index, which tracks broader semiconductor stocks, has shown signs of divergence from TSMC and Nvidia. While TSMC's American depositary receipts surged 4.3% after its Q2 earnings, the SOXX index remained volatile due to geopolitical risks and tariff concerns. ASML, a key supplier to TSMC, even cut its 2026 growth forecast by 11% in response to uncertainty. This divergence suggests that while AI leaders like TSMC and Nvidia are insulated, the broader sector faces headwinds.

AI Capex: A Double-Edged Sword

The Big Four—Meta, Microsoft, Amazon, and Google—are the primary drivers of AI infrastructure demand. Their combined 2025 capex plans exceed $300 billion, with Microsoft alone allocating $80 billion to Azure AI expansion. Amazon's $100B+ capex is particularly noteworthy, as AWS's AI business is growing at triple-digit rates.

However, rising costs and diminishing returns could temper this growth. For example, Google has reduced machine cost per query by 90% in 18 months through hardware and engineering advances, but scaling AI infrastructure remains capital-intensive. Meta's $60B–$65B capex is also a gamble, as its Llama models face stiff competition from OpenAI and Google. If ROI from these investments lags expectations, capex growth could slow, indirectly affecting chip demand.

Geopolitical and Structural Risks

The sector's vulnerability lies in its exposure to geopolitical tensions. The U.S. has imposed AI export controls on China, and potential tariffs under the Trump administration could disrupt supply chains. TSMC's gross margins, currently at 53%, are under pressure from the appreciating Taiwanese dollar (which reduces revenue by 1% per 1% appreciation). Meanwhile, ASML and TSMC are investing $100 billion in manufacturing expansions in Arizona, Japan, and Germany, but these projects are years from fruition.

A talent shortage also looms large. The semiconductor industry is struggling to attract skilled workers, and AI-driven automation may not fully offset this gap. If production bottlenecks emerge, even strong demand could falter.

Investment Implications: Bull or Bear?

For investors, the key question is whether to hold long in AI leaders like Nvidia and TSMC or hedge against a correction. The data suggests a nuanced approach:

1. Bull Case:
2. AI demand is in its early innings, with $697 billion in global chip sales projected for 2025.
3. Nvidia's Blackwell and TSMC's 2nm node (expected in late 2025) could unlock new growth cycles.

4. The SOXX index is still undervalued relative to AI's long-term potential.

5. Bear Case:

6. Overbought technical indicators (RSI >70, Golden Cross) suggest a pullback is likely.
7. Capex-driven demand may peak if ROI concerns emerge.
8. Geopolitical risks (tariffs, export controls) could erode margins and investor sentiment.

Conclusion: A Bull Market with Caution

The AI-driven bull market for semiconductors is far from over, but technical overbought conditions and intermarket divergences signal a need for caution. Investors should maintain exposure to AI leaders like Nvidia and TSMC but avoid overleveraging in the broader SOXX index. A correction in the 70–80% RSI range could offer a buying opportunity, but for now, the sector remains a high-conviction trade.

As the Federal Reserve prepares to cut interest rates in Q3 2025, liquidity for high-growth tech stocks may improve. However, the real test will come in 2026, when the full impact of AI capex and geopolitical risks materializes. Until then, the AI bull market is alive—but not unbreakable.