Why did tech stocks just plunge?

It’s been a rough week for big tech and chip-maker stocks:

• US markets wiped a trillion in value from tech stocks on Wednesday
• The ‘Magnificent 7’ alone (Microsoft, Amazon, Alphabet, Tesla, Meta, Nvidia, and Apple) had their worst day since 2012, and
• Tech stocks in Europe and Asia followed suit the very next day.

What’s going on? 

Markets are sending a few different signals:

• The ‘VIX’ volatility index (imperfect as it is) is still relatively low, but
• Two big earnings reports (Alphabet and Tesla) missed expectations
• AI-scepticism is rising, whether via the Goldman gurus doubting its progress, or the claims OpenAI could run out of cash in a year, and
• Strong US growth and rate cut hopes are nudging investors to pivot out of big tech and into smaller, more domestically-focused stocks.

But this week’s wipe-out looks broader than indices, earnings, nerds, or pivots.

At risk of sounding like ‘that friend’ who always wants to talk about House of the Dragon… yes, there are geopolitical drivers at play. And it’s not just us saying this. BoA’s fund survey now lists “geopolitical conflict” as the top tail risk.

And this week, in this sector? It’s all about China and chips.

Here’s why.

Broadly speaking, the global semiconductor sector rests on the tripod of US design, Dutch lithography, and Taiwanese manufacturing. And at first glance, all three legs look steady, right? According to their latest earnings, profit is way up at Nvidia 🇺🇸, ASML 🇳🇱, and TSMC 🇹🇼.

But here’s the thing – those three strong results have at least one big factor in common: China. It’s still the third-biggest market for Nvidia, the biggest market for both ASML and TSMC, and China sales for all three firms are still rising.

And that’s despite the US mounting a years-long, full-court press to limit China’s chip access on fears around its possible military uses.

So rumours have emerged that the US could resort to the nuclear option: a foreign direct product rule that’d allow the US to limit sales of foreign products if (like most of the global chip sector) they use even a teensy touch of US tech.

And while the specifics would vary, the signal is clear: more US chip controls. Throw in some rumours that Beijing is curbing local Nvidia sales, plus comments from Donald Trump suggesting TSMC’s home (Taiwan) should pay more for US security support, and it’s enough to wobble all three legs:

Nvidia is down 20% from its June peak, TSMC is down 14% from its July peak, and ASML dropped 14% in the week after the ‘nuclear option’ rumours emerged.

And those three legs aren’t just propping up any ol’ sector. The global chip sector is critical in both a functional and financial sense:

• Functionally, because it has a multiplier effect on other industries like tech, defence, telco, banking, and beyond, but also
• Financially, because ASML is Europe’s second-most valued company, TSMC is Asia’s biggest, and Nvidia is the world’s third largest.

So stepping back a little, you realise that there’s an awful lot of pension funds, sectors, strategies, and hopes all resting on a single tripod, which just took a wobble not just due to AI scepticism, but also US-China rivalry.

INTRIGUE’S TAKE

That’s a lot, but it’s also happening during history’s biggest-ever election year, with dissatisfied voters overshooting expectations in Mexico, undershooting them in India, inverting them in France, shooting them in the UK and South Africa, or just going full M. Night Shyamalan in the US with all the plot twists.

And we’re not even talking about his newer stuff. We’re talking full-blown, 1990s, Bruce-Willis-is-a-ghost M. Night Shyamalan.

And each of those elections alone opens up a whole new gyre of second-order questions around approaches to debt, tariffs, tech, energy, and war.

So with all those conflicting signals, what’s an investor to do? Maybe, just maybe, the most-streamed TV series on the planet, Bluey, offers an answer.

A recent episode opens with a fable called ‘The Farmer’, originating from China’s Huainanzi text of 139 BC. The farmer faces a series of life events that seem bad (losing a horse), then good (the horse returns with a mate), then bad (the mate injures his son), and so on. And to each trite suggestion that maybe a new event is good or bad news, the farmer simply replies “we’ll see”.

How’s that relevant?

Part of the message here is the need to step back and think longer-term. And when you do that, you hear less of the cyclical noise, and more of the structural roar: we’re entering a more competitive and contested world.

Also worth noting:

• Five tech firms (Nvidia, Meta, Broadcom, Microsoft and Amazon) have been responsible for ~80% of the Nasdaq 100’s gains this year.
• While ASML and Nvidia have developed trailing edge products for China (to comply with US tech controls), the US is also concerned about ASML engineers still servicing higher-end equipment in China.