Wall Street's semiconductor index lost over $500 billion in stock market value on Wednesday, marking its worst session since 2020, spurred by a report that said the United States was mulling tighter curbs on exports of advanced semiconductor technology to China.
Remarks from Republican presidential nominee Donald Trump saying key production hub Taiwan should pay the United States for its defense deepened selling in chip stocks.
The latest worries for chip investors come after Washington in recent years has adopted a more protective stance for the U.S. semiconductor manufacturing industry, which it views as strategically important for competing against China.
Tracking a heavy selloff on Wall Street that saw all major companies' shares slumping, chip stocks in Asia also suffered a blow, skidding on Thursday.
Among the worst hit were shares of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker, which has shed roughly NT$2 trillion ($61.35 billion) in market value over two days.
TSMC, which reports earnings later on Thursday, has taken a double hit this week from reports of the U.S. curbs as well as from Trump's remarks that Taiwan should pay America for its defense.
Taiwan plays an outsized role in the global chip supply chain. Analysts have warned that any conflict over the island may shatter the global economy.
TSMC fell more than 3%, joining other technology behemoths such as South Korea's major chipmakers Samsung Electronics and SK Hynix, which were down 1.85% and 4.1%, respectively, and Japan's Tokyo Electron, which slumped more than 8%.
The Global X Asia Semiconductor ETF was down 2.7%, reducing gains for the year to 13.5%.
The Bloomberg News report published during Asian trading hours on Wednesday said U.S. President Joe Biden's administration was weighing a measure called the foreign direct product rule that allows the U.S. government to stop a product from being sold if it was made using American technology.
That would potentially mean restrictions on companies such as Tokyo Electron and Netherlands' ASML.
TSMC's American Depository Receipts slid 8% on Wednesday. In its first-quarter earnings report, TSMC said 69% of revenue was from customers based in North America and 9% came from China.
Washington's protectiveness toward the U.S. semiconductor manufacturing industry, which it views as strategically important for competing against China, has raised increasing concerns for investors.
"It seems macro and geopolitical factors played a bigger role than fundamentals," said Kang Jin-hyeok, an analyst at Shinhan Securities in Seoul.
Kang was referring to the strong recent earnings releases from Samsung and ASML but noted the latter's heavy sales to China make it a target of the proposed U.S. curbs.
China accounted for about 49% of ASML's lithography system sales in the second quarter and represents about 20% of its order backlog.
ASML shares fell more than 10% on Wednesday, despite forecast-beating second-quarter earnings that showed a rise in artificial intelligence-linked bookings.
The Biden administration has moved aggressively to curb Chinese access to cutting-edge chip technology, including sweeping restrictions issued in October to limit exports of AI processors designed by firms including AI darling Nvidia.
The latest wrinkles in Sino-U.S. relations have sped up what appeared to be initial signs of investors' rotation from Big Tech stocks into smaller value ones, on the view that lower U.S. rates will benefit smaller companies.
"Positioning had become very extreme in the semi-conductor/AI space and the import curb comments catalyzed a de-risking event," said Jon Withaar, who manages an Asia special situations hedge fund at Pictet Asset Management.
Tech stocks have outperformed this year on the back of the global AI boom, with the Nasdaq up 20%, while the S&P 500 has surged 17%.
Still, even AI heavyweight Nvidia fell almost 7% on Wednesday, losing more than $200 billion in market capitalization.
Smaller rivals AMD and Arm dropped about 10%. Micron fell 6% and Broadcom lost 8%.
Companies with U.S. chip manufacturing operations gained, with GlobalFoundries jumping almost 7% and Intel edging 0.35% higher. Some analysts believe Intel could benefit from the geopolitical tensions as it is building several plants in the country.
"Market reactions are likely short-lived because the fundamental factors driving these markets haven't changed. Yes, U.S. restrictions on shipments to China will likely increase somewhat – regardless of the U.S. election outcome – but they've already been in place for a while," said Bob O'Donnell, chief analyst at TECHnalysis Research.
The curbs have dented U.S. chipmakers' sales to China. Nvidia's revenue from China stood at about 18% of its total revenue in the quarter ended April 28, compared with 66% in the year-ago period.
The sell-off in Asia on Thursday left major bourses in the red, with Tokyo's Nikkei down 2%, while Taiwan stocks slid 2.3%. South Korea's benchmark KOSPI index fell 1.34%. Hong Kong's Hang Seng tech index lost 1.5%.