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

Global markets are under pressure from both a worsening Middle East conflict and worries about AI’s future outlook. The valuation of Nvidia, the world’s most valuable company, has fallen to levels seen before the ChatGPT-fueled AI boom. This could mean a rare buying opportunity, but it also reflects deeper doubts in the market’s AI investment thesis.

Nvidia’s stock price has fallen nearly 20% from its previous all-time closing high in October last year. Its market cap has been eroded by more than $800 billion, and it is currently about $4 trillion. The first quarter is expected to record an approximately 10% decline. Its 12-month forward price-to-earnings ratio has dropped to around 19.6x, the lowest level since early 2019.

Notably, this valuation is even below the S&P 500’s overall P/E ratio of about 20x. Markets typically award high-growth companies a valuation premium. However, Nvidia’s expected earnings growth rate is as high as more than 70%, far above the S&P 500 constituents’ average of about 19%. This “valuation inversion” phenomenon is rare.

A double batch of negative factors crushes the valuation

The sharp contraction in Nvidia’s valuation stems from two major negative storylines that overlap.

First, geopolitical risk is driving recent macro sentiment. The U.S. and Israel’s military action against Iran has prompted concerns in the market about oil prices staying at elevated levels. Investors worry that inflation could return, forcing central banks around the world to raise interest rates again. This expectation drags on overall risk assets, and Nvidia is pulled into the broad selloff along with the broader market rather than being able to stand apart.

Second, doubts about whether investment in AI infrastructure can be monetized continue to simmer. The huge spending by Nvidia’s core customers—such as Microsoft, Alphabet, and Amazon—on AI infrastructure is viewed by the market as implying a longer monetization cycle than previously expected. There is still no clear timeline for when related returns will be realized, which weighs on investor confidence.

The disruption risk keeps the market on guard

Beyond macro concerns, technological iteration risk is also becoming another threat to suppress Nvidia’s valuation. In recent times, software companies’ stock prices have generally pulled back. The market is worried that the rapid evolution of AI technology will intensify industry competition and erode profit margins. The same logic also applies to the hardware space.

Triple D Trading’s in-house trader Dennis Dick said:

“All technologies, no matter what—including Nvidia—can be disrupted, and that’s the risk the market faces right now. Everything is currently running on Nvidia’s chips, but that doesn’t mean it will still be the case in two or three years. Changes are happening too fast, and I think that’s the market’s core concern.”

It’s worth noting that since the debut of ChatGPT, Nvidia’s stock price has risen by more than 1000%. Before that, its main business for a long time focused on the gaming graphics card market, and the shift to a leadership position in AI chips has only been a development of the past few years. This history itself also underscores the possibility that industry power dynamics can be reshaped quickly.

The fundamentals remain solid

Despite valuation pressure, Nvidia’s fundamentals have not deteriorated meaningfully. According to Reuters, the company has recorded rising gross margins for several consecutive quarters, which are now at 75%. At the same time, analysts continue to raise their expectations for future earnings growth.

Based on LSEG data, analysts’ average earnings growth expectation for Nvidia this fiscal year is above 70%, far higher than the S&P 500 constituents’ overall expected growth rate of about 19% for 2026. The decline in valuation is mainly driven by a “spread gap” between the fall in the stock price and analysts’ upward revisions to expectations.

In a horizontal comparison, Microsoft’s P/E ratio has dropped from about 35x in August last year to about 20x now, and Alphabet has also fallen from nearly 30x in January to about 24x. This suggests that the valuation reset across the AI sector this time is widespread.

Buying on dips? Institutions still take a constructive view

Although market sentiment has become more cautious, some institutions still hold a constructive view of Nvidia. B. Riley Wealth’s chief market strategist Art Hogan said that his company continues to recommend Nvidia to clients.

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

At the current valuation level below the market average, whether this is a rare discount buying window—or whether it truly reflects the market’s reservations about its long-term competitive position—remains undecided for now. And the answer, to a large extent, will likely depend on how the AI technology landscape evolves next.