A Chinese AI shock hits chip stocks hard

Good morning. One piece of news out of China rattled Wall Street yesterday. Moonshot AI released Kimi K3, a free open-weight model, and early reviews put it close to the best from OpenAI and Anthropic. It had the feel of last year's DeepSeek moment.

The reason it hit so hard is simple. If the US lead in AI looks less secure, the case for all that spending gets shakier, and chip makers, the biggest recipients of it, take the first hit. The Dow fell nearly 400 points and the semiconductor index is about 20% below its late-June level. Eighteen tech stocks have dropped 30% or more this month alone. Netflix slid on a growth warning, and Alphabet fell on a delay to its flagship AI model.

The whole market is not breaking down, though. The average stock is sitting near a record, and money is rotating into financials, energy and health care. The debate is whether this is a healthy reset or a drop the headline indexes are hiding.

The Middle East added pressure. Iran targeted Kuwaiti power and water facilities and ship attacks around Hormuz continued, lifting oil about 3% on the day. June consumer prices came in cooler than expected, but import prices rose unexpectedly, so the Fed is still seen as keeping a hike on the table.