‘Nasty’ chip stock rout plunges Nasdaq into correction territory
A global rout in chip stocks plunged the Nasdaq into correction territory on Tuesday just hours after South Korea’s bourse was forced to halt trading, in a sharp change of fortunes for what has been one of the year’s top performing exchanges.
New York’s tech-heavy index fell nearly two per cent at the US market open, pushing it to within a hair’s breadth of the 10 per cent threshold needed for a stock exchange to be in a technical correction.
Losses across both the Nasdaq and Korea’s Kospi were concentrated in semiconductor companies, which were subject to a brutal sell-off as investors questioned the scale and speed of AI firms’ vast investment plans.
The Kospi, which has become a bellwether for investors sentiment towards chip firms, shed more than 10 per cent of its total market capitalisation in a single session. The rout forced stock exchange officials to halt trading on the index for the third time in a matter of weeks, with chipmakers like SK Hynix and Samsung at the sharp end of the sell-off.
Tuesday’s correction followed a similarly bruising session on Monday, in a sign traders are becoming increasingly uncomfortable with the sky-high valuations ascribed to the companies selling the ‘picks and shovels’ of the AI boom.
Jitters over chip stocks ‘building for months’
Investor nerves were compounded by Monday’s blockbuster Shanghai IPO of CMXT, a Chinese chipmaker that jumped 466 per cent on debut and threatens to upend the semiconductor market for other big players.
“Nerves about the huge amount of cash being splashed have been building for months,” said Danni Hewson, head of financial analysis at AJ Bell. “Chip stocks have once again led declines as the market flexes, some companies like Amazon are upping their own chip capabilities and China’s CXMT stock market debut has cemented fears about a lost market for US companies constrained by trading restrictions.”
Chipmakers and other firms AI-adjacent firms have helped carry the Nasdaq to a succession of all-time highs this year, as investors rushed to gain exposure to beneficiaries of AI hyperscalers’ vast capital expenditure plans. Despite falling more than seven per cent since June, the tech-heavy index is still up more than eight per cent this year thanks largely to the semiconductor firms now leading declines.
Shares in memory juggernaut Sandisk fell more than 13 per cent when markets opened on Tuesday despite having already plunged more than 11 per cent the previous session. The firm has now shed more than half its value this month, while Western Digital is down 30 per cent this month.
The exuberance that had surrounding chip-related stocks had spawned a rapid proliferation in leveraged tracker funds covering the sector, which use debt to give investors more upside to any boom. But they also leave investors vulnerable to outsized losses when sentiment turns, exaggerating the current rout.
“The euphoria of May and June is long gone, but the selloff is still mostly limited to these tech sectors,” said Chris Beauchamp, chief market analyst at IG. Beauchamp added that tech juggernaut’s rising borrowing costs suggest “this has the potential to turn into something quite nasty”.
The FTSE 100 closed 0.8 per cent higher, having lagged rival indices for much of the year due to its defensive composition and absence of any specialist AI constituents. By comparison, Korea’s Kospi has risen nearly 40 per cent so far this year, despite being down nearly a third from its all-time high struck in early June.