* Global tech stocks have rough start to July after strong

rally

* US Philadelphia semiconductor index down nearly 20% from

June record

* China's Moonshot AI model intensifies doubts over returns

on US AI spending

* Alphabet, Tesla, Intel ( INTC ) scheduled to report earnings next

week

* Options market shows dip-buying activity

By Johann M Cherian and Saqib Iqbal Ahmed

July 17 (Reuters) - A selloff of the biggest winners of the

recent stock-market rally, such as high-flying chip stocks, is

sparking fresh concerns about the sustainability of the

AI-driven surge and whether investors have overextended

themselves.

Jitters in semiconductor stocks were felt from Seoul to

Europe as investors pulled back from AI-exposed stocks and

so-called momentum names that had powered portfolio returns

through much of this year.

The Philadelphia SE Semiconductor Index is down about

9% this week, on pace for its largest weekly fall in over a

year. The index was down nearly 20% from its late June all-time

high, a move that would indicate it has been in a bear market.

"The pullback reflects profit-taking and rising scrutiny of

AI capex sustainability," said Toni Meadows, head of investment

at BRI Wealth Management. "Valuations in semiconductor stocks

had priced near-perfect demand, for what has been a cyclical

area in the past, so was always going to leave stocks vulnerable

at some point in what has been a rapid rise."

The chip index remains up more than 60% for the year.

CHINESE STARTUP TURNS FOCUS TO AI SPENDING

Analysts have highlighted several reasons for this month's

sharp reversal.

Chinese AI startup Moonshot unveiled Kimi K3, a 2.8

trillion-parameter model that it said is the world's largest

open-weight AI system, rekindling investor scrutiny of the pace

of potential returns from hefty AI investments by U.S. tech

companies.

A report on Thursday suggested Alphabet's Google is

months behind schedule on the release of Gemini 3.5 Pro, its

most powerful flagship AI model.

Traders have faced a volatile start to July: South Korea's

KOSPI showed it was in a bear market last week despite being up

nearly 62% for the year, Japan's Nikkei fell into correction

territory on Friday, and Europe's tech sector is among this

week's top losers after its biggest quarterly jump since 2001 in

June.

After outperforming the benchmark S&P 500 by more

than two-to-one this year, the S&P 500 Momentum Index

, which tracks S&P 500 stocks with consistent strong

performance, has pulled back 10% in July, compared to a 0.8%

drop in the broader market.

This happened despite strong forecasts from the world's largest

chip manufacturer, Taiwan's TSMC and European

semiconductor equipment maker ASML.

Some semiconductor exchange-traded funds have recorded

steeper drawdowns. The Direxion Daily Semiconductor Bull 3X ETF

had slumped 57% from its late-June peak as of Friday

morning, although it remained up over 200% on the year.

LEVERAGE WORRIES

The sector weakness raised concerns about investors being

overextended or highly leveraged.

Tony Pasquariello, head of hedge fund coverage at Goldman

Sachs, said in a note to clients that leverage has built up

across the marketplace, seen for example in a rise in retail

margin, the assets under management of levered ETFs and the

volume in short-dated options.

Large hedge funds that typically use leverage to take bigger

swings at the markets to boost returns have in recent weeks

reduced their exposure to top AI infrastructure players,

according to executives at banks that cater to hedge funds.

"People got way overextended on these names," said Walter

Todd, chief investment officer at Greenwood Capital in South

Carolina. "There are a lot of people under the impression over

the last couple of months that these stocks only go up. And if

they borrowed money to buy the positions, then they (could be)

getting called out of them."

Options traders seemed more focused on buying the dip and

rotating into less crowded corners of the market than on

retreating from stocks altogether.

"Investors have generally been rotating rather than broadly

reducing risk," Chris Murphy, co-head of derivative strategy at

Susquehanna Financial Group, said, noting that the activity was

in line with trends seen over the past couple of weeks.

HARD HIT

On Friday, Nvidia ( NVDA ) shares were 1.6% lower, while

Advanced Micro Devices ( AMD ) slid 3.2% and Applied Materials ( AMAT )

fell 4.8%. Memory chip darlings Micron and

SanDisk ( SNDK ) erased early losses to trade slightly higher.

SpaceX dropped 4.6%, as a last-second abort of

Starship's 13th flight test piled more pressure after the stock

slipped below the $135 IPO price this week.

SK Hynix's ( SKHY ) U.S.-listed shares briefly

dropped below their offering price, before reversing losses to

trade 2% higher.

The focus now shifts to earnings reports from two of Wall

Street's Magnificent Seven. Alphabet and Tesla

are scheduled to announce quarterly earnings next week,

along with semiconductor company Intel ( INTC ).