Chip stocks, including Nvidia (NVDA), Taiwan Semiconductor Manufacturing (TSM), and ASML (ASML), have experienced significant growth this year, fueled by investor enthusiasm for the artificial intelligence boom. However, on Wednesday, this upward momentum came to a dramatic halt.
The decline in these stocks was driven by several factors, including rising investor concerns over potential export restrictions and a broader market rotation away from technology stocks.
One significant concern is the possibility of stricter export controls on semiconductor technology to China. According to Bloomberg, the Biden administration is contemplating more stringent measures that would restrict foreign-manufactured products utilizing even minimal American technology.
As a result of current restrictions, US companies have already seen reduced sales to China. For instance, Nvidia’s revenue from China dropped from 19% of total data center revenue in fiscal year 2023 to just 14% in fiscal year 2024.
ASML faced the steepest decline on Wednesday, plummeting over 12%. Despite surpassing second-quarter earnings expectations, the Netherlands-based chip equipment manufacturer’s revenue forecast for the upcoming quarter fell short of analysts’ consensus estimates. Additionally, ASML projected a quarterly gross margin between 50% and 51%, below Wall Street’s expectation of 51.1%.
Further complicating matters, former President Donald Trump’s remarks added to the market volatility. He stated that Taiwan “should pay” the US for protection against potential aggression from China, arguing that Taiwan does not provide adequate compensation for US support. His comments led to a more than 7% drop in shares of TSMC.
Taiwan is a critical player in the semiconductor industry, responsible for approximately 92% of the world’s most advanced chipmaking capacity, according to the US International Trade Commission. Many major chipmakers, including Nvidia, rely heavily on Taiwanese manufacturing.
In contrast, shares of Intel (INTC) and GlobalFoundries (GFS) saw gains during the session, benefiting from the Biden administration’s efforts to promote onshore chip production in the US.
The recent sell-off in semiconductor stocks coincides with a broader market trend where investors are shifting from large-cap technology companies to small-cap stocks. This rotation began last week after the latest inflation data raised optimism about potential Federal Reserve interest rate cuts in September.
The Russell 2000 index outperformed large-cap stocks over a five-session period, but on Wednesday, it fell roughly 1%, while the tech-heavy Nasdaq 100 declined nearly 3%.
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