Why did Nvidia suffer a record $279 billion loss, the biggest for a US company?

On, Tuesday Nvidia lost $279 billion in market value.

Shares of AI heavyweight Nvidia tumbled 9.5 per cent on Tuesday in the biggest ever loss of market value for a US company.

The development comes amid a broad market selloff following weak economic data and new cautiousness about artificial intelligence – which has fuelled much of this year’s stock market rise.

Let’s take a closer look:

What happened?

As per Forbes, a new report from the Institute for Supply Management seemed to weigh heavily on markets. The report revealed that manufacturing activity in the US was less than what was forecast in July.

Investors are worried that this can be a harbinger of economic activity further slowing down. They have also been broadly positioned for the past month.

Investors seemed to have softened their optimism about artificial intelligence in a broad market selloff.

More from Explainers

How ChatGPT is becoming everyone’s BFF and why that’s dangerous This Week in Explainers: How recovering from Gen-Z protests is a Himalayan task for Nepal

Nvidia lost $279 billion in market capitalisation, a major indication that investors are becoming more cautious about emerging AI technology that has fueled much of this year’s stock market gains.

The PHLX chip index plummeted 7.75 per cent, its biggest one-day drop since 2020.

The latest jitters about AI come after Nvidia last Wednesday gave a quarterly forecast that failed to meet the lofty expectations of investors who have driven a dizzying rally in its stock.

Bloomberg quoted BlackRock Investment chief Jean Boivin as saying “patience is needed” before AI takes off, a process of “years not quarters.”

“Such a massive amount of money has gone to tech and semiconductors in the last 12 months that the trade is completely skewed,” said Todd Sohn, an ETF strategist at Strategas Securities.

Impact Shorts

More Shorts

Ghaziabad woman dead, pilgrims attacked in bus… How Nepal’s Gen-Z protests turned into a living hell for Indian tourists

Were bodyguards involved in Charlie Kirk’s shooting? The many conspiracies surrounding the killing

Worries about slow payoffs from hefty AI investments have dogged Wall Street’s most valuable companies in recent weeks, with shares of Microsoft and Alphabet trading lower following their quarterly reports in July.

“Some recent research has questioned if the revenues from AI alone will eventually justify this wave of capital spending on it. When assessing AI capex by individual companies, investors must consider if they are making the best use of their balance sheets and capital,” BlackRock strategists wrote in a client note on Tuesday.

“Outside of the big tech companies buying among themselves, we haven’t really seen AI spread out across the economy,” Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, told Bloomberg. “There’s still a big question about the ROI from all this spending. And if you go back to the dot-com era, the first winners of the internet weren’t always the final winners. We’re not yet at a place, in terms of valuations, where I’d want to buy this dip.”

Subpeona from justice department

Nvidia also lost another two per cent of market value after getting a subpoena from the US justice department, as per Bloomberg.

The development came as the regulator deepened its probe into the AI heavyweight’s antitrust practices, Bloomberg News reported on Tuesday, citing people familiar with the investigation.

The antitrust watchdog had previously delivered questionnaires and has now sent legally binding requests to Nvidia, the report said, adding that other companies had also received subpoenas.

Officials are concerned that the chipmaker is making it harder to switch to other suppliers and penalises buyers that do not exclusively use its artificial intelligence chips, the report said.

The move marks an escalation of a crackdown the chip giant has reportedly been subjected to.

Last month, the Information reported that the Department of Justice had launched an investigation into the company after complaints from competitors that it may have abused its market dominance.

At its July record high close, Nvidia had almost tripled in 2024. Its recent losses leave it up 118 per cent year to date.

Tuesday’s weakness in chip stocks accompanied wide declines on Wall Street, with the Nasdaq dropping 3.3 per cent and the S&P 500 down 2.1 per cent.

The chip index is now up 14 per cent in 2024, just under the S&P 500’s 16 per cent gain.

Intel dropped nearly nine per cent after Reuters reported CEO Pat Gelsinger and key executives are expected to present a plan to the company’s board of directors to slice off unnecessary businesses and revamp capital spending at the struggling chipmaker.

Concerns about rate cuts, job numbers

Investors mostly expect the Federal Reserve to cut interest rates by 25 basis points in its September 18 policy announcement, according to CME’s FedWatch Tool.

However, minority expectations of a 50 basis point cut rose to 37 per cent from 30 per cent after data on Tuesday signalled activity in the manufacturing sector remains soft.

Investors will get a host of data on the labour market this week, culminating in Friday’s key government payrolls report.

“There’s concern about what the job numbers are going to show, about seasonality,” warned Steve Sosnick, a market strategist at Interactive Brokers.

“Are we actually going to stick this soft landing, or are we going to get some type of a report later this week that shows unemployment is starting to rise substantially?” Brian Mulberry, client portfolio manager at Zacks Investment Management asked Bloomberg.

“That’s where you’re starting to see a lot of this volatility coincide, and it’s just hitting the most overvalued sectors first, and people are starting to look for actual earnings growth, real revenues on the balance sheet. And more importantly than anything, really stable forward guidance.”

“With equities sharply off the August lows as we enter a well-known period of weak seasonality, and with the first rate cut widely expected and arguably already priced in, it’s not too surprising to see some de-risking as investors await more data and clarity,” Christopher Jacobson, co-head of derivative strategy at Susquehanna International Group told the outlet.

Following Nvidia’s quarterly report last week, the mean analyst estimate for annual net income through January 2025 has climbed to $70.35 billion from about $68 billion ahead of last week’s report.

Those increased earnings estimates, combined with Nvidia’s share losses, have the chipmaker now trading at 34 times expected earnings, down from over 40 in June and in line with its two-year average.

Broadcom, another chipmaker that has benefited from the boom in AI computing, fell 6.2 per cent ahead of its quarterly report on Thursday.

Investors are also concerned about the upcoming presidential polls.

“Given the pretty divergent proposals from the two candidates, this election is going to be one of the biggest issues for markets over the next two months,” Deutsche Bank strategist Jim Reid was quoted as saying by Fortune.

With inputs from agencies