Chip manufacturers, particularly Nvidia, the largest by market capitalization, were anticipated to continue experiencing losses on Wednesday following a significant sell-off the day before. This downturn reflects the rising apprehension among investors on Wall Street regarding the high valuations of these stocks in light of decreasing enthusiasm for AI-related advancements.

Nvidia’s stock dropped by 1.3% in early trading after a striking 9.5% decrease the previous day, erasing $279 billion from its market capitalization – marking the most substantial single-day loss recorded for a U.S. corporation.

This year’s strong performance in the equity market has largely hinged on excitement surrounding advances in artificial intelligence, which has driven chip company valuations to levels that many investors now view as excessively high.

Concerns over a lag in returns from large investments in artificial intelligence have increased, especially after Nvidia’s guidance last Wednesday failed to meet the optimistic expectations of the market, despite the company reporting robust growth in quarterly revenues.

“Investors are now turning their attention to overall valuations in the U.S. equity market, and it seems that some tech stocks carry significant premiums,” stated Tai Hui, J.P. Morgan Asset Management’s chief market strategist for Asia based in Hong Kong.

Nvidia’s share value has dropped approximately 20% since reaching its peak on June 18. Presently, its forward price-to-earnings ratio is just under 30, indicating a reduction in its valuation. Notably, the stock has surged over 650% since the beginning of 2023.

“While the potential for AI development is exciting, the main question remains how these companies will capitalize on this progress and justify the significant capital expenditures currently underway. Investors are waiting for clarity on this front.”

Other chip manufacturers, such as Arm Holdings, Broadcom, Applied Materials, and U.S.-listed shares of Dutch chip equipment company ASML, experienced declines between 1% and 4% in early trading on Wednesday.

Intel also faced a decrease of 1.5%. Earlier on Wednesday, Reuters reported setbacks for the company’s contract manufacturing segment after unsuccessful tests with Broadcom.

Nvidia’s shares are under further pressure following a report from Bloomberg News, which indicated that the U.S. Department of Justice issued a subpoena to Nvidia as part of its growing investigation into the company’s antitrust actions in the AI sector.

Analysts have cautioned that the scrutiny from regulators regarding Nvidia is likely to intensify. The company recently revealed that it has received inquiries from regulators in the U.S. and South Korea.

“Nvidia stands as the leading entity within the AI chip market and is also involved in various AI companies, suggesting that it has numerous interests,” remarked Dan Coatsworth, an investment analyst at AJ Bell.

“Regulators may be eager to determine whether Nvidia is providing preferential treatment to its invested companies or to customers who depend solely on its chips.”

Conversely, rival Advanced Micro Devices saw an increase of over 2% after appointing former Nvidia executive Keith Strier as its senior vice president of global AI markets late Tuesday.

Reported by Deborah Sophia in Bengaluru; with additional contributions from Tom Westbrook; edited by Arun Koyyur and Janane Venkatraman