Chip stocks are at record highs as a share of the S&P 500, and while the rally still has room to run, two warning signs are starting to show.

• Semiconductors now make up 18% of the S&P 500, four times their historical average and higher than software ever got at its peak.
• Hedge funds and mutual funds are dumping software (including Microsoft) and piling into chip stocks like Micron, ASML, and Intel — chasing momentum.
• Google bragged that AI token usage jumped from 9.7 trillion to 480 trillion to 3.2 quadrillion, but the growth rate actually collapsed 86% — meaning AI demand growth is slowing under the surface.
• Micron just hit a $1 trillion market cap with huge pricing power — revenue tripled while costs barely rose — but Wall Street forecasts show earnings growth crashing after next year.
• China is expected to start making its own memory and Nvidia-style chips by around 2031, which would squeeze the current hardware boom.

Outlook: The chip rally still has room to run short-term, but the slowing AI growth rates and stretched valuations are early signs the trade will eventually hit a wall.