July 17 (Reuters) - A rotation out of the biggest winners of

the recent rally gathered momentum this week, sending chip

stocks toward their steepest weekly decline in more than a year

and sparking fresh concerns about the sustainability of the

AI-driven surge.

The jitters in semiconductor stocks were felt from Seoul to

Europe as investors pulled back from AI-exposed stocks that had

powered portfolio returns through much of this year.

The Philadelphia SE Semiconductor Index is down 11%

this week, which would mark its largest one-week fall since

March 2025, if current levels hold. The index was down nearly

24% from its late June all-time high, on pace to confirm 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 semi-conductor 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 has climbed nearly 62% for the year, as of

early trading on Friday.

Shares of Nvidia ( NVDA ) fell 3%, while Qualcomm ( QCOM )

and Broadcom ( AVGO ) lost about 2% each. Memory chip darlings

Micron and SanDisk ( SNDK ) lost around 3% each.

SpaceX lost 4%, as a last-second abort of

Starship's 13th flight test piled more pressure after slipping

below the $135 per share IPO price earlier this week.

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

2.7% and were trading near their offering price. The stock has

lost more than 9% this week.

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 globally have had a volatile start to July. South

Korea's KOSPI index confirmed a bear market last week,

while still being up nearly 70% for the year. Japan's Nikkei

tumbled into correction territory on Friday.

Europe's tech sector is among the top sectoral

losers this week, after having notched 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

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

in the broader market.

Strong forecasts from the world's largest chip manufacturer,

Taiwan's TSMC, and European semiconductor equipment

maker ASML did little to halt the slide.

The focus now shifts to earnings reports from two of Wall

Street's so-called 'Magnificent Seven' group. Alphabet

and Tesla are scheduled to announce quarterly earnings

next week.

Space stocks were also down this week after rallying earlier

this year in anticipation of the potential boost to the sector

from SpaceX's debut.

Rocket Lab ( RKLB ) and Intuitive Machines ( LUNR ) were

down 3% and 4% on Friday and were set to log losses of about 20%

each this week.

(Reporting by Johann M Cherian and Shashwat Chauhan in

Bengaluru; Editing by Sriraj Kalluvila)