The Nasdaq 100 is on the brink of a correction, with a notable slump in chip stocks leading to significant market anxiety. The technology-heavy index is experiencing downward pressure as investors grow increasingly concerned about the sustainability of the AI boom. This skepticism is fueled by fears of artificially inflated demand, excess capital expenditure by AI companies, and a potential overvaluation of the sector.
The downturn in the chip sector saw companies like Nvidia fall by 4.5% and Japanese chip-equipment makers including Nikon Corp. and Tokyo Electron Ltd. slide more than 9%. In Asia, SK Hynix sank 14.7% and Samsung more than 13%, with TSMC also taking a hit. These losses were exacerbated by reports of a Chinese state-backed company beginning mass production of advanced lithography machines, intensifying fears of growing competition from China. The debut of China's CXMT, which soared 465% on the Shanghai Stock Exchange, further highlighted this competitive threat.
Adding to investor worries is the disclosure of substantial capital spending plans by major tech firms. Alphabet Inc. raised its capital spending forecast to as much as $205 billion this year, reigniting concerns about fiscal discipline in the AI race. A report that Nvidia might provide a $250 billion guarantee to help finance an OpenAI data center also raised questions about "circular financing" within the AI ecosystem, where suppliers finance their own customers, potentially distorting demand.
Analysts like Kyle Rodda from Capital.com and Hebe Chen from Vantage Global Prime highlighted that investors are not ready to overlook issues of excess capital expenditure, spending by AI companies eating into returns, and doubts over spending, returns, and valuations. This sentiment is casting a long shadow over the sector, with upcoming earnings reports from giants like Microsoft, Meta Platforms, Apple, and Amazon being closely watched for insights into AI spending and return on investment.
Compounding these market fears is the heightened attention on the Federal Reserve's policy announcement, with traders seeing a roughly one-in-three chance of a rate hike. Citadel Securities even anticipates a rate increase this week, which would signal a hawkish shift and further impact market sentiment amidst the ongoing tech sector volatility.
