"A Very Uncomfortable Situation": What Wall Street Is Saying About the Plunge in Chipmakers' Stocks

On October 13, investors around the world continued to sell off shares of chipmakers. The sell-off, driven by growing concerns about the return on investment in AI, was exacerbated by fears of intensifying competition from China, an IMF warning about global risks in the event of a market correction, and comparisons of the market to a casino. What are analysts saying about what’s happening?

Shares of chipmakers Micron Technology and SanDisk fell more than 5% in New York trading. The Philadelphia Semiconductor Index (SOX) dropped more than 2%, extending its decline to five consecutive trading sessions. Since the beginning of October, it has lost more than 3%.

European stocks of semiconductor manufacturers and equipment makers also fell sharply. ASML shares dropped by more than 4%, STMicroelectronics by 3.8%, and BE Semiconductors by 1.8%.

The KOSPI index of the South Korean stock market, which is dominated by semiconductor manufacturers, fell by more than 5%. Shares of the sector’s two largest companies—Samsung Electronics and SK Hynix—fell 7% and 10%, respectively, during trading in Seoul. In Tokyo, shares of memory manufacturer Kioxia dropped 13%.

Investor caution is also evident in the initial public offering (IPO) market. Late last week, Firmus, a data center operator backed by Nvidia, canceled its $5.5 billion IPO amid waning investor interest.

Nevertheless, it is still too early to say that the AI boom is over, Reuters notes. Meta's stock rose 3.8% following the release of a new artificial intelligence model.

The sell-off has become the clearest sign of a shift in sentiment in the artificial intelligence sector, which—since the launch of ChatGPT four years ago—has been considered the top investment theme of the decade, according to Reuters. Investors are increasingly concerned that rising bond yields and higher interest rates could slow the boom in investment in computing infrastructure, the agency notes.

According to Damien Boy, portfolio strategist at Wilson Asset Management, the key factor was not so much the rise in bond yields itself as the increase in their volatility, which is beginning to affect asset valuations across the entire market.

“This is a very favorable situation in many respects,” he said. “Perhaps the pace of capital spending on AI will slow down somewhat, and some players will fall victim to this process.”

“Investors are increasingly concerned that the first cracks are beginning to appear in the AI market,” said Dan Coatsworth, head of research at AJ Bell, in a statement to Morningstar. According to him, there are growing concerns that companies are investing enormous sums in AI without a clear idea of when and to what extent these investments will begin to pay off.

High bond yields and expectations of several interest rate hikes over the next 12 months also create an unfavorable backdrop for growth stocks, which include a significant portion of companies in the AI sector. This is because, under such conditions, the present value of future cash flows decreases, Coatsworth explained.

“The high valuations of tech companies are largely based on the promise of jam tomorrow, rather than the jam of today,” he said, paraphrasing a metaphor from Lewis Carroll’s *Through the Looking-Glass*.

“I believe we are entering the next phase of the AI development cycle, as markets increasingly focus on monetization and return on invested capital. I wouldn’t call this the end of the AI investment boom,” said Mark Velann, chief investment officer at Lucerne Asset Management, in an interview with Reuters. According to him, the “crash” in South Korea says more about investor positioning and the cost of capital than about a fundamental deterioration in demand for AI. But the decline in the South Korean market could be an early sign of a broader correction, he noted.

Pressure on Korean stocks intensified following reports that the Chinese company CXMT had made significant progress in developing a new memory architecture capable of competing with technologies currently being developed by leading memory chip manufacturers. This has cast doubt on investors’ previous expectations regarding the timeline for technological development and heightened concerns that cheaper Chinese solutions will reach the market faster and weaken the positions of industry leaders, noted Morningstar equity analyst Jing Jie Yu.

“If the company succeeds in commercializing this technology before its competitors, it will serve as compelling evidence of China’s technological competitiveness in the DRAM sector and will heighten the long-term risks of oversupply amid the rapid expansion of production capacity in the country,” the analyst said.

The world’s richest man, Tesla and SpaceX CEO Elon Musk, joined the discussion. “When China finds a way to manufacture a particular product, its ability to scale up often surpasses that of the rest of the world combined. We’ve seen this with lithium-ion batteries and solar energy,” Musk wrote in on the social network X.

The stock market decline coincided with a decision by the research division of BlackRock, the world’s largest investment firm, to revise its outlook for the U.S. market. On October 12, it downgraded its rating on U.S. stocks to neutral, citing “potential volatility surrounding the expansion of AI capacity.”

And on Tuesday, the International Monetary Fund (IMF), in its report on global financial stability, identified the collapse of stocks in companies related to artificial intelligence as one of three significant risks to the global financial system.

"The consequences of a correction in the artificial intelligence sector could be global," the IMF noted. The IMF cited a sharp rise in government bond yields and a major cyberattack as other risks.

Concerns about the sector were further fueled by remarks from Broadcom CEO Hock Tan, who on October 12 compared investing in AI to gambling. “Many investors have no idea what they’re investing in,” Tan said at an event in Singapore on October 12. “They have extremely high expectations, and then it turns out to be almost like being in a casino,” he added.

This article was AI-translated and verified by a human editor