Stocks on Wall Street fell sharply this week after a strong rally that has been on and off since 2022.
This was influenced by assessments that the long-term unsustainable record growth was fueled by large investments in the development of artificial intelligence.
Fears of new trade tensions between the US and China also contributed to this.
Biggest drop in Nasdaq since 2001.
The Nasdaq technology index lost 2,8 percent on Wednesday, July 17, the biggest one-day drop since December 2022, and chipmakers since March 2020 amid market panic over the coronavirus pandemic. At the same time, Nasdaq lost more than 2001 percent for the first time since 2,5, RSE reminds.
Trade tensions with China shook the stock market
Trade tensions with China also contributed to the fall in the stock markets. According to Forbes, US President Joe Biden plans to introduce additional restrictions on companies supplying China with chips.
This will affect the Dutch company ASML the most, whose shares fell 11,5 percent on Wednesday. ASML sold 49 percent of its lithography system to China in the second quarter. Also, about 20 percent of orders to this Dutch company are waiting for deliveries to China.
Biden's measure would also affect the Japanese Tokyo Electon, whose shares fell by 7,5 percent on Wednesday.
The US government has blocked China's access to advanced chips and equipment to make them, citing security concerns, and has urged its allies to follow suit.
"Bloomberg's report that the Biden administration is discussing tighter restrictions on exports of semiconductors and semiconductor equipment to China has caused a disturbing stir," said analyst Patrick O'Hare at Briefing.com.
And the shares of the world's largest chip manufacturer - Taiwan's TSMC - fell 6,9 percent on Wednesday after the Republican candidate for the US president, Donald Trump, criticized this self-governing island claimed by Beijing, and Washington pledged to defend it.
"They took 100 percent of our chip business. I think Taiwan should pay for our defense. You know, we're no different than an insurance company. Taiwan doesn't give us anything," Trump told Bloomberg.
After this statement by Trump, TSMC lost $52 billion in market value in two days.
TSMC produces 55 percent of all chips in the world and more than 90 percent of the most advanced processors, reports the Times.
"That makes OPEC's 40 percent share of global oil production unimpressive," said V. Paul Chioyu, a professor at Northwestern University in Boston.
America's addiction to Taiwanese chips
Earlier this year, US Commerce Secretary Gina Raymondo told a House Appropriations Committee hearing that TSMC is "way ahead of anything we do in the United States."
Therefore, the US, based on the Chip Financing Act, granted TSMC $11,6 billion in April of this year to soon begin production of its most advanced chips on American soil.
She added that a Chinese invasion of Taiwan and the seizure of TSMC would be "absolutely devastating" for the United States.
According to a 2023 study by the U.S.-Taiwan Business Council, losing access to Taiwan's semiconductor industry would have a negative impact on the U.S. economy — greater than the 2008 global financial crisis or the 2020 COVID-XNUMX shutdown.
A significant disruption to Taiwan's semiconductor industry could cost as much as $1.6 trillion, roughly eight percent of the U.S. annual gross domestic product. Electronic devices, the automotive industry and telecommunications would be especially vulnerable.
In May, ASML, the sole global supplier of EUV photolithography machines, informed the Dutch government that it had installed a switch in an extreme ultraviolet (EUV) lithography machine it sold to TSMC, allowing it to automatically shut down if China attacked Taiwan, according to Bloomberg.
Is the value of shares overstated?
In addition to geopolitical and geoeconomic tussles, experts claim that the value of stocks is "overinflated".
The latest correction comes after a long rise in the stock markets (bull's market). For example, the S&P 500 is up more than 70 percent from its 2022 low and has risen for 28 of the past 37 weeks, its best streak in more than three decades.
In particular, the shares of large technology companies, which they call the "Magnificent Seven" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), have grown, fueled above all by the development of artificial intelligence.
The most obvious example is Nvidia, whose shares have jumped 155 percent this year, before falling 7,2 percent on Wednesday.
Investing in research and development of artificial intelligence has enabled huge growth for large technology companies regardless of the state of the overall economy and high interest rates.
This has helped mask the weaknesses of the real economy, which is facing high borrowing costs to curb inflation.
"Markets cannot grow indefinitely based on just a few companies," said JJ Kinahan, CEO of IG North America.
But during the past week on Wall Street there has been a certain turn of events. Instead of piling up stocks in Big Tech, which critics see as overpriced, investors are increasingly turning to smaller companies whose profits are closely tied to the strength of the real economy and other areas that have been attractive for a while.
This is a continuation of a recent trend that market analysts called encouraging, because the shares of a wider number of companies are growing, not just a handful of the all-powerful elite.
Thus, the shares of companies in the smaller Russell 2000 index rose on Wednesday, at the time of the big break on the stock markets, based on the expectation that interest rates will soon be reduced.
Meanwhile, the real economy has remained remarkably resilient so far, the labor market has remained solid and investors largely expect the Federal Reserve to begin cutting interest rates in September as inflation has slowed despite fears that the US could slip into recession. at the beginning of 2025 due to inflation, which is still a burden on the economy.
In the event of a recession, the S&P 500 could fall by more than 30 percent, according to several forecasts, which would resemble the dot-com crash of 2000.
American economist Harry Dent has warned of the risk of a market crash, which he predicts would surpass the global recession of 2008.
"Goldilocks" economy
Although the US economy is doing much better than other G7 members, it faces uncertainty due to the effects of rising tariffs, economic decoupling with China and overall rising protectionism.
As ABC News writes, Wall Street hopes that the economy can remain in the state of "Goldilocks", without excessive pressures on the market that encourage inflation, but at the same time avoiding a drastic slowdown of the economy that would push it into recession.
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