NVIDIA's stock slips 7%, forecast pulls down other tech stocks as AI enthusiasm gets a caution

NVIDIA’s stock took a significant hit on Wednesday, declining by almost 7 per cent in after-hours trading despite the company’s recent impressive performance in AI chip sales. This decline erased $200 billion from NVIDIA’s market value and had a ripple effect across the tech sector, pulling down shares of other major technology firms and raising concerns among investors.

The dip in NVIDIA’s stock followed the release of the company’s quarterly earnings report, which, despite strong results, failed to meet the lofty expectations set by the market. NVIDIA’s third-quarter forecast for gross margins appeared to miss market estimates, and its revenue prediction, while robust, was largely in line with what analysts had anticipated. This tempered outlook, combined with the company’s forecasted revenue of $32.5 billion for the upcoming quarter, dampened investor enthusiasm.

The disappointment extended beyond NVIDIA, affecting other key players in the tech industry. Shares of Broadcom and Advanced Micro Devices (AMD) each fell by about 2 per cent, while Microsoft and Amazon both saw nearly a 1 per cent drop. In total, AI-related companies saw a combined loss of around $100 billion in market value. The decline in Nasdaq futures by approximately 1 per cent indicated that traders expected these losses to continue into the next trading day, potentially setting a negative tone for the broader market.

NVIDIA’s recent success had been driven by surging demand for its AI chips, which had allowed the company to consistently surpass analysts’ expectations. However, the latest forecasts, coupled with the unveiling of a $50 billion share buyback, seemed insufficient to satisfy investors who had grown accustomed to NVIDIA’s trend of substantial outperformance. The sentiment was echoed by market observers who noted that while NVIDIA’s numbers were strong, the company’s sky-high expectations made it difficult for any result to truly impress.

This lukewarm response to NVIDIA’s earnings report could have broader implications for market sentiment, especially as the stock market enters what is typically a volatile period. Historically, September has been a challenging month for the S&P 500, which has averaged a decline of 0.8 per cent since World War II, making it the worst-performing month of the year.

The recent earnings season has already shown that investors are quick to penalize tech companies that fail to meet high expectations. NVIDIA’s stumble adds to the growing concern about the sustainability of the AI-driven rally that has propelled tech stocks over the past year. In particular, there is rising unease about the increasing spending by major players like Microsoft and Alphabet, which has yet to be fully justified by their earnings.

NVIDIA’s stock, which had gained about 150 per cent in 2024, still stands as the biggest winner in the ongoing AI boom. However, the current market valuation, at 36 times earnings, may be seen as a potential risk, especially as the broader market, represented by the S&P 500, trades at a more conservative 21 times expected earnings. As NVIDIA navigates these challenges, investors will be closely watching its performance, particularly in light of the upcoming U.S. employment report, which could further influence market direction.