Middle East conflict adds to AI panic, NVIDIA's P/E ratio drops to a seven-year low!

Global markets are under dual pressure from escalating Middle East conflict and worries about the AI outlook. The valuation of Nvidia, the world’s most valuable company by market cap, has fallen to levels seen before the AI boom sparked by ChatGPT. This could mean a rare buying opportunity, but it also reflects deeper doubts in the market about the rationale for investing in AI.

Since last October’s market close marked its all-time high, Nvidia’s stock price has dropped nearly 20% in total; its market capitalization has been shaved by more than $800 billion, and it is currently about $4 trillion. The first quarter is expected to record about a 10% decline. Its 12-month forward price-to-earnings ratio has fallen to roughly 19.6x, the lowest level since early 2019.

Notably, this valuation is even below the S&P 500’s overall forward P/E of about 20x. The market typically assigns a higher valuation premium to high-growth companies. Nvidia’s expected earnings growth is as high as over 70%, far above the S&P 500’s average of about 19% for constituent stocks—this “inversion” is rare.

Double negative factors crush the valuation

The rapid contraction in Nvidia’s valuation stems from two negative factors that reinforce each other.

First, geopolitical risk has been driving the recent macro sentiment. Military action by the U.S. and Israel against Iran has sparked market concerns about crude oil staying at elevated levels. Investors worry that inflation could return, which would prompt central banks to raise rates again. That expectation drags down overall risk assets, and Nvidia is not immune—it gets pulled into the broad selloff affecting the whole market.

Second, doubts about whether AI infrastructure investment can translate into returns continue to build. Nvidia’s core customers such as Microsoft, Alphabet, and Amazon have been making massive spending on AI infrastructure. The market believes the monetization cycle will be longer than previously expected, and when related returns will materialize remains unclear, putting further strain on investor confidence.

Disruption risk keeps the market on edge

Beyond macro concerns, technological iteration risk is becoming another hidden factor weighing on Nvidia’s valuation. Recently, the share prices of software companies have generally pulled back. The market worries that the rapid evolution of AI technology will intensify industry competition and erode profit margins. This logic also applies to the hardware sector.

Triple D Trading proprietary trader Dennis Dick said:

“All technology, no matter what—including Nvidia—can be disrupted. That’s the risk the market is focused on right now. Everything today runs on Nvidia’s chips, but that doesn’t mean it will be the case two or three years from now. Things are changing too fast, and I think that’s the market’s core concern.”

It’s worth noting that since the launch of ChatGPT, Nvidia’s stock price has risen more than 1000% in total. Before that, its main business for years focused on the gaming graphics card market, and the shift to becoming a leader in AI chips has only happened in recent years. This history itself also underscores how possible it is for industry dynamics to be reshaped quickly.

Fundamentals remain solid

Despite valuation pressure, Nvidia’s fundamentals have not suffered meaningful deterioration. According to Reuters, the company has recorded improving gross margins for several consecutive quarters; they are now at 75%. At the same time, analysts continue to raise their forecasts for the company’s future earnings growth.

Based on LSEG data, analysts’ average earnings growth expectation for Nvidia this fiscal year is above 70%, far higher than the overall expected growth rate of about 19% for S&P 500 constituent stocks in 2026. The decline in valuation is mainly driven by the “gap between” falling share prices and analysts raising expectations.

In a side-by-side comparison, Microsoft’s P/E has fallen from about 35x last August to roughly 20x today, and Alphabet has also dropped from nearly 30x in January to about 24x. This suggests that the valuation reset in this AI sector is broad-based.

Buy the dip? Institutions remain constructive

Even as market sentiment turns cautious, some institutions still take a constructive view of Nvidia. B. Riley Wealth’s Chief Market Strategist Art Hogan said its company continues to recommend Nvidia to clients.

“Trading at a P/E below the S&P 500, I think that’s an easy decision to make,” Hogan said.

At this valuation level, below the market’s average, is it truly a rare opportunity to buy at a discount—or is it an accurate reflection of the market’s reservations about its long-term competitive position? There is currently no definitive answer— and the answer will depend largely on how the AI technology landscape evolves next.

Risk disclosure and disclaimer

        The market involves risk; investments require caution. This article does not constitute personal investment advice, nor does it consider any individual users’ specific investment objectives, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their particular circumstances. Any investment made based on this is at your own risk.