Explaining Nvidia’s historic stock price drop

Nvidia, the world’s leading AI chipmaker, led a global stock sell-off on Wednesday, with stock indexes in Asia, Europe and the United States falling.

Investors sold 9.5% of the company’s shares, worth $279 billion, after news broke on Tuesday that the U.S. Department of Justice had issued a subpoena to Nvidia as part of an antitrust investigation. The sale was bad news for Nvidia and rekindled existing concerns about the strength of the AI ​​sector and the U.S. economy in general.

It’s a testament to NVIDIA’s size and influence that a single company could have such an impact on global stock prices. NVIDIA is the third most valuable company in the world. Because of its dominance, NVIDIA’s success (or failure) can move the tech-heavy Nasdaq stock index on which it is listed. And because NVIDIA is so closely tied to other tech companies, when NVIDIA’s stock price falls, so do its partners’ stock prices, such as Taiwan Semiconductor Manufacturing Co. (TSMC), which in turn lowers markets overseas. In the U.S., NVIDIA has caused a selloff across the tech industry. As of Wednesday afternoon, shares of Microsoft, Amazon, and Intel were down, while shares of NVIDIA competitor Advanced Micro Devices were up.

“One of the big risks is that it’s a concentrated market and if those stocks become volatile it will have a ripple effect across the market,” Justin Onuekusi, chief investment officer at investment firm St James’s Place, told Reuters on Wednesday.

While Nvidia was the catalyst for this week’s stock market crash, several other factors have also spooked investors. Recent concerns about a slowing Chinese economy have dampened a wide range of businesses, including the oil industry, which is already suffering from falling prices. Weakness in U.S. manufacturing and rising prices in that sector are also contributing factors.

Investors have big concerns about whether the U.S. tech industry is heading in the right direction. Questions about whether Nvidia is overvalued and whether it’s wise to invest so heavily in AI technology have dogged the tech industry for months. Analysts at JPMorgan Asset Management and BlackRock warned earlier this week that huge investments in AI are not justified because the technology has limited applications outside the tech industry.

Companies like Microsoft and Meta have ignored this advice, spending 40% of their hardware budgets (tens of billions of dollars) on NVIDIA gear to accelerate their own AI products. But investors worry that tech companies are betting too much on a future that may never come. And if these giants make the wrong bets, their stock prices could fall with them.

“(Tech companies) are all saying, ‘Look, we’re not going to be on the wrong side of this. We’re going to invest,'” Daniel Neumann, CEO of global technology research and consulting firm Futurum Group, told Vox. “But we haven’t heard what this is going to benefit or where. And I think (Wall Street) is a little hesitant. People want to know where the benefits are going to come from.”

All of this, from worries about the Chinese economy to the strategies of tech companies, comes at a time when some financial and economic experts are warning that the U.S. is on the brink of a recession — and this week’s turmoil has only added to worries that they might be right.

Wednesday’s plunge is certainly cause for concern, but it’s too early to tell whether it tells us anything about the risks of a recession.

Stock market performance is not the only or best indicator of the economy’s health. Stocks have recovered from a volatile sell-off early last month on news that the Federal Reserve will cut interest rates, making credit cheaper and encouraging people to make big purchases and businesses to hire and make other investments.

The Federal Reserve is expected to cut interest rates by a quarter percentage point when it meets this month, which could ease some recession fears, but that alone is unlikely to completely erase them.

While the United States is not currently in a recession (traditionally defined as two consecutive quarters of negative gross domestic product (GDP) growth), there are concerns that high inflation and interest rates could push the economy into a recession, which could curb production and increase unemployment.

Nvidia’s fall this week probably won’t be the final indicator of whether the economy will slip into a recession, and it’s possible that any downturn won’t last very long, but it says something about the market’s reliance on the tech sector and is just the latest sign of how much uncertainty remains in the U.S. economy.