A staff introduce Nvidia GeForce series equipment on display at Computex in Taipei, Taiwan June 5, 2024. PHOTO: Reuters file

Shares of Nvidia, a leading player in the AI sector, experienced a significant decline of 9.5 percent on Tuesday, September 3, marking the largest single-day loss in market value for a U.S. company. This downturn reflects a shift in investor sentiment regarding artificial intelligence amid a broader market selloff triggered by disappointing economic indicators.

Nvidia's market capitalization decreased by $279 billion (S$364 billion), signaling a growing caution among investors towards the emerging AI technologies that have largely driven this year's stock market performance.

The PHLX semiconductor index fell sharply by 7.75 percent, representing its most substantial one-day decline since 2020.

Concerns surrounding AI intensified following Nvidia's quarterly forecast last Wednesday, which did not align with the high expectations set by investors who have propelled a remarkable surge in its stock price.

Todd Sohn, an ETF strategist at Strategas Securities, commented, "The influx of capital into technology and semiconductors over the past year has created a highly imbalanced market."

Additionally, Intel's shares dropped nearly nine percent after a report from Reuters indicated that CEO Pat Gelsinger and other key executives are preparing to present a strategy to the board aimed at divesting non-essential business units and restructuring capital expenditures at the struggling chip manufacturer.

Concerns regarding the slow returns on substantial AI investments have recently affected Wall Street's leading firms, with shares of Microsoft and Alphabet declining following their quarterly earnings reports in July.

"Recent studies have raised doubts about whether the revenue generated from AI will ultimately validate the significant capital expenditures associated with it. When evaluating AI capital expenditures for individual companies, investors need to determine if they are optimizing their balance sheets and capital effectively," noted BlackRock strategists in a client communication on Tuesday.

At its peak closing price in July, Nvidia had nearly tripled in value for 2024. Despite recent declines, it remains up 118 percent year to date.

The downturn in chip stocks on Tuesday coincided with broader declines across Wall Street, as the Nasdaq fell by 3.3 percent and the S&P 500 decreased by 2.1 percent.

Most investors anticipate that the Federal Reserve will implement a 25 basis point interest rate cut during its policy announcement on September 18, according to CME's FedWatch Tool.

Nonetheless, the likelihood of a 50 basis point cut has increased to 37 percent from 30 percent following Tuesday's data, which indicated continued softness in the manufacturing sector.

This week, investors will receive a variety of labor market data, culminating in the crucial government payrolls report on Friday.

"There are concerns regarding the upcoming job numbers and their seasonal effects," cautioned Steve Sosnick, a market strategist at Interactive Brokers.

The chip index has risen 14 percent in 2024, slightly trailing the S&P 500's 16 percent increase.

Nvidia experienced a historic single-session decline in market value, surpassing the US$232 billion drop that Meta Platforms faced on February 3, 2022, following a disappointing forecast, as reported by LSEG data.

In the wake of Nvidia's recent quarterly earnings report, the average analyst projection for annual net income through January 2025 has risen to US$70.35 billion, up from approximately US$68 billion prior to the report.

This upward revision in earnings estimates, coupled with Nvidia's stock price decrease, has resulted in the company trading at 34 times its anticipated earnings, a reduction from over 40 in June and consistent with its two-year average.

Meanwhile, Broadcom, another semiconductor company benefiting from the surge in AI technology, saw its shares drop by 6.2 percent ahead of its quarterly earnings announcement scheduled for Thursday.