ASML, Nvidia and other chippers are scrambling after a major crash: are the AI concerns justified?

It is still a havoc on global stock markets, but investors are seeing green numbers on the signs again today. Chip stocks in particular are picking up after their toughest day since the corona crash.

ASML, Nvidia and other chip companies are up several percent. Yet this only made up for a small part of yesterday's racing violence.

AI worries led to a terrifying sale yesterday, and leverage made things even worse. The Philadelphia Semiconductor Index (SOX), the measure of US chip stocks, fell 12.25 percent. That's the biggest drop in a single day since March 2020.

The turmoil is not about the usefulness of AI or the hunger for chips. Investors fear a brake on the construction of the data centers in which these chips have to be installed.

In Tuesday's midterm elections, the Democrats won both Houses of Congress and a series of governorships. Among them were candidates who openly fought data centers in their campaign, mainly because of the rising energy bill.

And Arizona Democratic Congressman Yassamin Ansari even posted a message on X on Wednesday calling for “a ban on artificial superintelligence.”

That yielded painful figures yesterday. Micron and AMD fell more than 17 percent, Broadcom and Intel more than 10 percent. Nvidia experienced its second worst trading day ever with a loss of 9.3 percent, accounting for some $447 billion in market value.

Nvidia is now about 24 percent below its record set at the beginning of October, Micron 46 percent and Intel almost 63 percent.

Today, the chip shares are cautiously springing up. At the time of writing, Nvidia is about 2.9 percent higher in forex trading, AMD 5.3 percent and the Dutch ASML has risen about 2.6 percent.

A ban on AI or a nationwide stop on data centers does not seem obvious for the time being. The new Congress must pass laws first, and President Donald Trump can veto them.

To break that veto, a two-thirds majority is needed, and the Democrats do not have one in either House. Trump is also still in the White House until the beginning of 2029.

Governors can intervene in their own state. Still, Texas' newly elected governor, Gina Hinojosa, sounds milder than her campaign promise of a freeze. She told CNN host Jake Tapper that data centers will remain welcome as long as there are rules and local communities have a say.

“It's not that I hate data centers. I hate the way they abuse Texas,” Hinojosa said. According to her, the construction stop should only last until those protective rules are in place.

Moreover, with a ban, America would give away its position in the AI race to China, and Washington won't let that happen.

The collapse was mainly due to fear. Investors have long worried about the huge amounts of money tech companies like Microsoft and Meta are putting into AI. Those expenses are the turnover of chipmakers, so every brake on them affects Nvidia and co. directly.

The figures seem to support that. Nvidia costs about 15 times the profit that analysts expect for the coming year. That measure is called the P/E ratio (P/E): the lower the number, the less an investor pays for every dollar of profit.

At 15, Nvidia is cheaper than the average S&P 500 company at around 18.5. For the company, this is the lowest level in at least five years, while analysts are still raising their earnings expectations.

At memory maker Micron, the gap is even bigger. The share stands at a P/E of only 4.8, despite record gains. Broadcom comes out with about 24 times the expected profit. AMD remains with more than 50 times the expensive exception, even after a decrease of 38 percent since October.

A low P/E isn't always a bargain. With memory chips, the lowest P/E often coincides with the highest profit, just before prices fall again. Nevertheless, the figures show that prices have fallen much faster than earnings expectations.