Chip stocks suffer a mini-meltdown as more potential trade restrictions threaten the industry

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In today's big story, we're looking at why reports of more potential trade restrictions have chip companies on their heels.

What's on deck:

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The big story

Chipping away

One of the buzziest sectors of the stock market faced a noticeable setback.

Chip companies like Nvidia and AMD saw their share prices drop Wednesday off a report that President Joe Biden is considering further tightening China trade restrictions, writes Business Insider's Kelly Cloonan.

As part of its ongoing trade war with China, the Biden administration is mulling leveraging a rule allowing it to control foreign products that use American-made tech, according to Bloomberg.

The immediate impact of such a move would be felt by foreign players like Netherlands-based ASML, which would have to alter its business with China. It finished down almost 13%.

But even US companies not directly impacted felt the sting of the report. Shares in AI chipmakers Nvidia and AMD were down more than 6% and 10%, respectively.

Even if November's election brings a new administration, chipmakers might not get relief. Trump recently complained about Taiwan taking away the US's chip-manufacturing business and suggested it should pay the US for protection against China. Shares in Taiwan-based TSMC dropped more than 8%.

I prefer chips you can dip in guacamole — so I turned to BI's senior reporter Emma Cosgrove, who covers chip companies, to help make sense of it all.

Does the reaction to more potential trade restrictions seem overblown, or is there real concern here?

Trade restrictions are certainly real concerns for chip companies. Restricting any company from selling its products in a market as large as China is enough to cause understandable angst. Combine that with the expectation that the peak for these stocks is imminent, or maybe behind us, and the result is the market reaction we've seen. But there are no immediate industry-wide shifts here.

What about Trump's comments regarding Taiwan? Is that an even bigger issue for the industry?

The supply-chain base for most of the chip industry is in Taiwan, specifically TSMC. Since China claims Taiwan, TSMC's location is an ever-present source of uncertainty in this industry to which no one really has an answer. It's a major reason, among others, that politicians are interested in bringing more chip manufacturing to the US.

What's the knock-on effect for those relying on these chips for their AI plans?

Politicians and regulators have no interest in making American AI companies less competitive and demand is still extremely high. My sources tell me supply is improving and that's likely to continue.

With so much geopolitical tension, is it possible the chip industry becomes more regionalized?

Short-term: no. To oversimplify, the more impressive the chip, the more complicated it is to make. It's not just a matter of investment in US manufacturing. It's specialized equipment, talent, and expertise that's really difficult to replicate. There is more US chip manufacturing on the way, but not to the scale that it will tip the geopolitical balance in a major way any time soon.

3 things in markets

1. Even the safest corners of commercial real estate are reeling. Single-asset, single-borrower bonds, which aren't considered risky investments, have seen a spike in defaults. The percentage of those types of bonds that were in or approaching default was 8.7%, roughly triple what it was a few years ago.
2. Economists say we're ready for rate cuts. But is the Fed? The end of the month brings another interest-rate meeting, but a cut seems unlikely despite improving economic conditions. Experts weigh in on why the central bankers need to consider offering relief. According to one Fed official, rate cuts could come in the "not-too-distant future."
3. Stocks set to boom from the AI revolution. Longtime tech analyst Dan Ives predicts positive Q2 earnings will inject life into the sector, predicting a 15% rise in 2024. These 11 AI and cloud-spending stocks look particularly promising.

3 things in tech

1. Social media's once and future king. Although YouTube once dominated the creator economy, it lost ground during the rise of short-form video platforms like TikTok. But YouTube has once again cemented itself as influencers' favorite among all creative options.
2. Will tech experience a red wave? Billionaires are coming out in full force to support Donald Trump, whose running mate is venture capitalist-turned-senator JD Vance. That attitude could make more startups openly supportive of the former president, as investors anticipate a Trump administration to be startup-friendly.
3. Advice from a Gen Z data scientist on getting a job in the industry. Although AI jobs are all the rage, most colleges don't have AI-specific degrees yet. To land a job, this JPMorgan data scientist says to prioritize hands-on experience over formal education and advises building AI projects.

3 things in business

1. Spotify rewards quantity over quality (Business Insider's Version) (From the Vault) (Insider Today Remix). Streaming apps like Spotify and Apple Music have changed the way users interact with music. That incentivizes artists to keep dropping iterations of the same songs and albums — or simply make more.
2. Men's insecurities are big business. As the direct-to-consumer health industry has boomed, so have men's health startups. Companies like Hims and Ro promise to help with everything from hair loss to fertility. They have men right where they want them: insecure and ready to pay for a solution.
3. Elon Musk is embracing Texas. Will other business leaders follow suit? The Tesla CEO seems to think so, but many tech companies that moved there in the past have faced a lot of problems. A lot of their workers just don't like it as much as California.

In other news

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• AMD's AI head explains how it's tackling Nvidia's 'lock-in' and the GPU shortage with an open-source approach.

What's happening today

• Donald Trump will give his acceptance speech at the Republican National Convention. It's his first public speech since last weekend's assassination attempt, which he said he rewrote after the shooting.
• Netflix, KeyCorp and other companies are reporting.

The Insider Today team: Dan DeFrancesco, deputy editor and anchor, in New York. Jordan Parker Erb, editor, in New York. Hallam Bullock, senior editor, in London. Annie Smith, associate producer, in London. Amanda Yen, fellow, in New York.