Nvidia’s historic stock losses, explained

Nvidia, the world's leading AI chip maker, triggered a global stock market crash on Wednesday, with indices falling in Asia, Europe and the United States.

After Bloomberg reported on Tuesday that the U.S. Justice Department had served Nvidia with a subpoena as part of an antitrust investigation, investors sold $279 billion worth of shares — representing 9.5 percent of the company's stock. On Wednesday, a spokesman denied that the company had received the subpoena, but said Nvidia “is happy to answer any questions regulators may have about our business.”

Still, the sell-off is bad news for Nvidia and renews existing concerns about the strength of the AI ​​sector and the U.S. economy in general.

That one company could have such an impact on global stock prices is a testament to Nvidia's size and reach. Nvidia is the world's third most valuable company, and its dominance means its success – or failure – can change the tech-heavy Nasdaq stock index on which it is listed. And because the company is so closely intertwined with other technology companies, when its stock falls, so do the shares of its partners, such as Taiwan Semiconductor Manufacturing Company, which dragged down markets overseas. In the U.S., Nvidia sparked sell-offs across the technology industry. Shares of Microsoft, Amazon and Intel were down Wednesday afternoon, while Nvidia rival Advanced Micro Devices posted gains.

“One of the biggest risks is this market concentration. And all it takes is the volatility of these names for that to impact the entire market,” Justin Onuekwusi, chief investment strategist at investment firm St. James's Place, told Reuters on Wednesday.

While Nvidia sparked this week's stock market crash, there are several other factors that have unsettled investors. Recent concerns about China's sluggish economy are putting a damper on a variety of companies, including the oil industry, which is already struggling with falling prices. Weak manufacturing in the U.S. and some higher prices in that sector are also part of the equation.

Investors have significant concerns about whether the U.S. technology sector is heading in the right direction. Questions about whether Nvidia is overvalued and whether it makes sense to invest so heavily in AI technology have dogged the technology sector for months. Analysts at JPMorgan Asset Management and Blackrock warned earlier this week that massive spending on AI is not justified because the technology has limited applications outside the technology sector.

Companies like Microsoft and Meta have ignored that advice and spent up to 40 percent of their hardware budgets – tens of billions of dollars – on Nvidia products to speed up their own AI products. But that has raised concerns among investors that the tech companies are betting too much on a future that may never come. And that if these giant companies make the wrong bet, they could drag the stock market down with them.

“[Tech companies are] everyone is saying, 'Look, we're not going to be fooled by this. We're going to invest,'” Daniel Newman, CEO of Futurum Group, a global technology research and advisory firm, told Vox. “But I'm not hearing what the returns are or where they're going to get. And I think there's a little hesitation in [Wall Street] – people want to know where this return comes from.”

All of these worries – from concerns about China's economy to the strategy of technology companies – come at a time when some financial and economic experts are warning that the U.S. is headed for a recession. And this week's turmoil has only heightened concerns that those experts may be right.

There is no doubt that Wednesday's sell-off is a cause for concern, but it is too early to say whether it tells us anything about the risk of a recession.

Stock market performance isn't the only – or even the best – indicator of the health of the economy. Stocks rebounded from last month's early, volatile sell-off on news that the Federal Reserve would cut interest rates, making borrowing cheaper and hopefully making it easier for people to make big purchases and businesses to hire employees and make other investments.

At its meeting this month, the Fed is expected to cut interest rates by a quarter of a percentage point, which could ease some recession fears. But that alone is unlikely to completely dispel concerns.

Although the United States is not currently in a recession – a recession traditionally defined as negative gross domestic product growth for two consecutive quarters – there are fears that one could develop. The reason for this is high inflation and high interest rates, which could limit production and lead to higher unemployment.

Nvidia's crash this week is probably not the ultimate indicator of whether the economy will slide into recession, and it may not even last that long. But it says something about the markets' dependence on the technology sector – and it's just the latest reminder of how much uncertainty still exists about the U.S. economy.

Update, September 5, 11am: This story was originally published on September 4 and has been updated to include a statement from a Nividia spokesperson who denies that the company received a subpoena.