Chip stocks slid for a second consecutive session on Tuesday, July 28, 2026, as investors weighed reports that Nvidia was negotiating to backstop a roughly $250 billion data-center project for OpenAI. Nvidia shares fell roughly 1% in premarket trading, adding to Monday's steep losses that wiped about $250 billion from the company's market capitalization in a single session. Morningstar analysts, however, called the panic overblown, arguing that the deal aligns with Nvidia's long-standing strategy of cultivating the AI ecosystem rather than signaling demand trouble.
What Sparked the Chip Stock Rout
The selloff accelerated as several headlines converged on the same day. Weekend reports indicated Nvidia was in talks to provide a roughly $250 billion backstop for OpenAI as part of a massive data-center expansion. Critics quickly framed this as a circular financing arrangement: Nvidia invests in AI companies that then buy Nvidia chips, creating a dependency loop that could amplify risk if AI infrastructure buildouts slow.
The broader chip sector felt the pressure. The iShares Semiconductor ETF (SOXX) fell 2.4% on Tuesday, extending Monday's sharp decline. Other major chip names bore the brunt: Intel dropped 28.07% to $87.90, AMD fell 13.78% to $476.00, and Micron declined 13.39% to $852.93 as of 11:54 AM EDT on July 28, 2026, according to Vantafin market data. Nvidia itself traded around $194.41, down roughly 0.58% at the same timestamp.
China's growing competitiveness added another layer of concern. ChangXin Memory Technologies, the country's largest memory chip maker, debuted on the Shanghai Stock Exchange and surged nearly 470% on its first day of trading, briefly becoming the most valuable listed company in mainland China. Separately, new AI models from Moonshot AI (Kimi K3) and DeepSeek are reportedly nearly on par with leading U.S. frontier models but at a fraction of their cost.
Morningstar: OpenAI Deal Fears Are Overblown
Morningstar analysts pushed back directly on the market's reaction. In a report issued July 28, 2026, the firm wrote that the concerns around the speculated OpenAI financing deal were overblown.
"We continue to believe that investors should properly be aware of such deals, but we don't view the report as a sign that AI demand is a mirage. AI token usage continues to rise exponentially, while AI hosting companies appear to be computing constrained," Morningstar analysts stated.
The firm sees the OpenAI backstop as consistent with Nvidia's existing playbook. According to Morningstar: "Our understanding is that Nvidia is providing backstops to some neoclouds, enabling them to receive better financing terms for buildouts in exchange for sharing some of their AI hosting revenue with Nvidia. A similar OpenAI deal would be much larger and more prominent, but in our view, is squarely in line with Nvidia's broader strategy of seeding and developing the AI ecosystem for all players."
Given the high likelihood of strong AI capital expenditures across the near, medium, and long term, Morningstar argues Nvidia's growth prospects are underrated.
Nvidia's Fundamentals Tell a Different Story
Despite the selloff, Nvidia's Q1 FY2027 earnings report, released May 20, 2026, tells a story of sustained demand strength. The company posted EPS of $1.87 against a $1.76 estimate, and revenue of $81.61 billion against an $78.42 billion consensus estimate, per Vantafin earnings data. Data center revenue reached $75 billion, up 92% year over year and 21% sequentially, driven by Blackwell architecture systems.
CEO Jensen Huang described AI infrastructure spending as on track to reach $3 trillion to $4 trillion annually by the end of the decade. Hyperscaler capital expenditures are projected to exceed $1 trillion by 2027, and the number of partner data centers exceeding 10 megawatts has nearly doubled in one year to more than 80 sites.
For Q2 FY2027, Nvidia guided revenue of approximately $91 billion, plus or minus 2%, with data center expected to remain the primary growth driver. The next earnings release is scheduled for August 26, 2026.
Retail Sentiment and Market Context
Retail sentiment on StockTwits was mixed across the chip sector: neutral for Nvidia, bullish for AMD, and extremely bullish for Intel. Some traders dismissed the selloff as speculative noise tied to weekend headlines.
"Well the whole TAM bs doesn't even matter," one trader wrote. "The reality is these companies are building these data centers, and computers are all that will matter in the end."
Another commented: "Speculative news of potential funding OpenAI datacenter by Wall Street news caused damage, unbelievable."
The sharp one-day market cap loss for Nvidia, while dramatic, must be weighed against a company that still commanded a $4.71 trillion market cap entering the week.
The Bottom Line
The chip stock selloff reflects genuine investor unease about how Nvidia is financing its role in the AI buildout. However, Morningstar's case rests on observable data: AI token usage rising exponentially, AI hosting companies compute-constrained, and hyperscaler capital expenditure projected to exceed $1 trillion in 2027. Whether the OpenAI backstop represents prudent ecosystem development or a structural risk will depend on the deal's specific terms. For now, Nvidia's fundamentals and the broader AI infrastructure spending trajectory remain intact, even as the stock reacts sharply to headline risk.