The AI hype cycle faces its first setback as summer doldrums drag on some of this year's biggest winners

• Even AI-related stocks haven't been immune from this month's market sell-off.
• Shares in semiconductor firms have slipped, with Nvidia set for its first monthly decline of 2023.

Stocks are off to disappointing start for the month – and the theme that's taken markets by storm this year seems to be under pressure.

The S&P 500 is down 5% and the tech-heavy Nasdaq Composite has slumped 7% over the first 13 trading days of what's typically the quietest month of the year for investors – and even artificial intelligence isn't immune from the sell-off.

Here's a round-up of AI's struggles this August:

• Semiconductor giant Nvidia, which has emerged as one of the market's biggest winners in 2023 after riding the ChatGPT wave to a $1 trillion-plus valuation, is on track for its first monthly decline of the year, with shares down 7%. That's wiped more than $80 billion off its value, per Insider calculations.
• Other stocks from the sector are also struggling, with the PHLX Semiconductor Index (SOX) that gauges the share price of 30 chipmakers down more than 10%.
• Exchange-traded funds tracking AI are also plunging, with Global X's Robotics and Artificial Intelligence ETF falling 15% from its late July peak. Roundhill's Generative AI ETF and Global X's AI and Technology ETF have also plunged from their respective peaks.
• Investors are betting more than ever against those funds, with short interest in the two Global X ETFs recently hitting the highest level on record, according to data from MarketBeat.

Several factors have taken the shine off the AI rally in August, including spiking US Treasury yields – which have made bonds more attractive relative to stocks – and traders' fears that sticky inflation will lead to the Federal Reserve holding interest rates higher for longer.

The investing theme is still one of the biggest success stories of the year, with Nvidia, SOX, and various AI-tracking ETFs all having racked up massive gains.

Whether AI can carry on driving valuations higher remains to be seen – and will likely prove to be one of the major stories for markets over the final third of the year.