Why Tech Stocks Crashed on Wednesday

The tech market took it on the chin on Wednesday as the trade war picked up steam and the Federal Reserve sounds like it's not going to bail out the market.

Big tech in both the U.S. and China were hit hard today. Broadcom (NASDAQ: AVGO) fell as much as 6.7%, Alibaba Group (NYSE: BABA) dropped 5.6%, and JD.com (NASDAQ: JD) fell 6.4%.

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Nvidia and President Trump's chip restrictions

After the market closed on Tuesday, investors learned that Nvidia would need a license to sell H20 processors into China, but that license hasn't been granted and it doesn't seem likely it will be.

The direct impact on Nvidia is a $5.5 billion write-down in the first fiscal quarter this year, but the impact could be much broader. The escalation of the trade war between the U.S. and China could split the global market into two systems, which would have the impact of forcing Chinese companies to develop chips and technology they currently buy from the U.S.

This would likely be a negative for companies like Broadcom, which wants to sell globally. But for Chinese companies like Alibaba and JD.com it may put pressure on their tech products if they aren't able to buy the best chips in the market to build their artificial intelligence products.

The Fed didn't save the day

On top of the Nvidia news, the Federal Reserve chair Jerome Powell spoke on Wednesday after the two-day OMC meeting that sets short-term interest rates. Rates were held flat and Powell said the central bank can be patient with rate decisions as the economy and markets process President Donald Trump's tariffs and their impact.

He did say the Fed expects higher inflation and slower growth than it had previously expected, but the labor market and economy remain solid for now. The negative impact of tariffs were likely put off because importers brought in excess goods in the first quarter to front-run tariffs, which will have a negative impact on GDP growth despite not fundamentally changing the economy.

The market may be looking for rate cuts to save the day, but cutting rates with high inflation could make inflation worse, so the Fed is in a tough position. Today, at least, a wait-and-see approach is being met by selling by investors.

Where does tech go from here?

The last few years have been a boon for tech companies and that's in large part because growth tailwinds in the U.S. and internationally have driven more operating margin expansion as they scale.

But if the world is splitting into U.S.- and China-centric tech industries with barriers between the two, it lowers the upside for any tech company, and that could potentially reduce profitability.

Investors aren't going to wait for the negative earnings reports to come in a few months, they're going to sell stocks now and ask questions later. This is a "risk off" environment, and if the trade war continues there could be much more selling ahead.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Alibaba Group, Broadcom, and JD.com. The Motley Fool has a disclosure policy.