Chipmaker sell-off sends investors to other stocks and bonds for safety

By John Towfighi, Hanna Ziady, CNN

New York/London (CNN) — A global rout in semiconductor chip stocks sent investors rushing into different sectors and government bonds on Thursday as they looked for safety in other corners of the market.

The S&P 500 bounced back from an initial decline and rose 0.33%, led by gains in health care stocks. The Dow rallied 556 points, or 1.08%, boosted by gains in sectors like consumer discretionary and materials. Treasury yields dropped sharply as bonds rallied.

A closely watched index of chip stocks fell 0.88% Thursday, dropping for the seventh day in a row. Thursday’s drop followed sharp market declines overnight in Taiwan, South Korea and Japan, which are hubs for chipmakers.

The Nasdaq Composite closed higher by 0.08%, erasing losses after dropping as much as 1.4% after the opening bell. The Nasdaq got some relief as software stocks rallied, and investors bought the dip on some stocks that had dropped in recent days.

Semiconductor chip stocks bounced around in volatile trading. The closely watched semis index fell as much as 4.4% before paring some losses. Chipmakers extended a recent bout of turbulence as worries linger about rising borrowing costs for the AI buildout and competition from China.

Chip stocks have had a rocky week, weighing on the tech-heavy Nasdaq and broader market. The Nasdaq and S&P 500 on Wednesday posted their worst day since July, as shares of companies involved in the AI buildout, including chipmakers, tumbled.

“Worries about the AI buildout, bubbly valuations, lower-than-expected earnings growth at leading US frontier labs, Chinese competition, inflation and rates sent investors running for the covers,” Neil Wilson, a strategist at investment bank Saxo wrote in a note.

Indications of a slowing pace of revenue growth at Anthropic and OpenAI added to investor concerns, Wilson said. Multiple news outlets reported that Anthropic, at an investor presentation ahead of its planned IPO expected in the near future, announced its sales grew 45% to $17 billion last quarter. Growth had more than doubled in the second quarter.

Chip stocks stumble

Companies making semiconductor chips, which are critical for the AI boom, have experienced extraordinary growth this year.

But after strong rallies earlier this year, and rising uncertainty about the data center buildout, stocks are taking a hit. The closely watched index of chip stocks is down roughly 20% since a peak in June.

C.C. Wei, the CEO of Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest manufacturer of advanced chips, sounded a cautious note during an earnings call Thursday. He told analysts that rising component prices and macroeconomic uncertainty were challenging demand in some segments of the market.

The company’s shares finished 2% lower despite bumper earnings, contributing to a 3.5% decline in an index of Taiwan’s technology stocks.

South Korea’s Kospi led declines in Asia, finishing 7.6% lower on sharp drops in chipmakers SK Hynix (-11%) and Samsung Electronics (-9.5%). The scale of the decline triggered a circuit breaker, temporarily halting trading on the exchange — a frequent occurrence this year in a stock market dominated by just two stocks. Japan’s Nikkei finished 4.9% lower, with Hong Kong’s Hang Seng down 1%.

The Kospi, heavily weighted in chipmaker titans Samsung and SK Hynix, closed at a six-month low, erasing all of its gains since April. The Kospi in June was up as much as 116% on the year, but has since slumped more than a third, leaving year-to-date gains at 32%.

Adding to market jitters is growing competitive pressure from China, after Chinese semiconductor company CXMT announced progress on advanced memory chips.

Rising rates and AI debt unsettle investors

The global retreat in chip stocks followed a sharp sell-off on Wall Street on Wednesday, after a strong US inflation report bolstered worries that rising interest rates will make it more expensive for companies to fund AI investments. Many AI companies are already heavily indebted.

CoreWeave, a data center and compute provider backed by Nvidia, is under scrutiny from analysts as rising interest rates complicate the outlook for the company, which has tens of billions of dollars of debt on its balance sheet.

CoreWeave shares dropped 15.5% on Wednesday. On Thursday, shares initially dropped before erasing losses and gaining 6% after Nvidia CEO Jensen Huang told Bloomberg that he’s optimistic about the company.

Investor sentiment has soured over neoclouds like CoreWeave, or companies that provide specialized AI cloud infrastructure. Research firm Gartner published a report on Wednesday forecasting that over 80% of neocloud providers will cease operations by 2030, due to costs and lack of a unique business model.

Wall Street is also grappling with uncertainty over the political climate around data centers heading into the midterm elections. Investors are betting on an enormous buildout, and data center moratoriums or other slowdowns could hurt forecasts for returns on investments.

AI stock valuations have been volatile throughout the year. The frontier AI companies – Anthropic and OpenAI – remain privately traded, so investors look for clues about AI demand elsewhere. Any report that hints about slumping demand or higher-than-expected costs of building out AI infrastructure has frequently sent stocks on a rollercoaster ride.

“A slowdown in the AI infrastructure build out would imply a sharp slowdown in US growth expectations,” Mohit Kumar, chief European economist at Jefferies said in a note. The US is spending more on AI annually as a percentage of GDP than it did on building railways across the country in the 1800s, he noted.

But fears of a bubble suddenly popping have tended to be overblown.

“We expect the earnings season to justify that earnings and demand remain robust,” Kumar added. He cautioned, however, that Jefferies “would look to take some chips off the table” ahead of the midterms because a potential Democrat win in Congress “would be considered negative for the sector.”

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