Key facts
- The Nasdaq Composite entered correction territory Tuesday, marking a decline of over 10% from its recent peak.
- A sharp sell-off in chip stocks, including SK Hynix and Sandisk, intensified investor fears.
- South Korea's Kospi index dropped 12%, triggering a trading halt.
- Concerns about the sustainability of AI spending and high valuations are driving the sell-off.
- Upcoming earnings from Microsoft and Meta are seen as crucial tests for the AI trade.
The Nasdaq Composite index entered correction territory Tuesday, with a nearly 2% drop at the U.S. market open, driven by a significant sell-off in chip stocks. This downturn marks a sharp reversal for the tech-heavy exchange, which had been a top performer this year. South Korea's Kospi index also suffered substantial losses, shedding over 10% of its market capitalization in a single session and prompting multiple trading halts.
Investor sentiment soured as concerns grew over the scale and speed of investment plans by artificial intelligence firms and the sky-high valuations of companies supplying the AI boom. SK Hynix's operating profit soared more than sixfold but still missed analysts' lofty estimates, a miss that coincided with investor fretting about the sustainability of AI spending and long-term returns from booming chip demand. The recent blockbuster Shanghai IPO of Chinese chipmaker CMXT, which surged 466% on its debut, further intensified fears of market disruption for established players.
Nerves about the huge amount of cash being splashed have been building for months, with companies like Amazon increasing their in-house chip capabilities. The CMXT debut has solidified concerns about lost market share for U.S. firms. Despite recent declines, the Nasdaq remains up more than 8% year-to-date, largely due to the performance of semiconductor firms. However, shares of memory giants like Sandisk have plummeted, with Sandisk falling over 13% on Tuesday and losing more than half its value this month, while Western Digital is down 30%. The proliferation of leveraged tracker funds in the sector has amplified both the upside during the boom and the current downside.
Rising borrowing costs for tech giants suggest the situation has the potential to turn into something quite nasty. In contrast, the FTSE 100 closed 0.8% higher, benefiting from its defensive composition and lack of direct AI constituents. The Kospi, despite its recent sharp fall, has seen a year-to-date gain of nearly 40%, though it is now down significantly from its early June peak. Oil prices jumped after U.S. Central Command reported the interception of Iranian ballistic missiles, shattering the sense of calm in markets that had lasted the past few days. Concern about declining oil supply as well as inflationary pressure weighed on sentiment ahead of a U.S. Federal Reserve policy decision.