Asian markets extended a brutal sell-off on Wednesday, with South Korea's Kospi plunging 11% and Japan's Nikkei 225 dropping 3%, as record earnings from chipmakers failed to calm investor anxiety over the high price of the artificial-intelligence boom. The rout, which also saw Taiwan's Taiex slide 3.6%, reflects a market shift from questioning AI demand to questioning whether profits can keep pace with ever-rising expectations.
Record profits, but not enough
South Korea bore the brunt of the retreat. The Kospi lost 11% by midday, following a 10% decline on Tuesday. SK Hynix, a key memory-chip supplier, sank 12.6% despite reporting record second-quarter revenue of 79.32 trillion won and operating profit of 60.54 trillion won, driven by premium memory products and robust AI demand. Samsung Electronics fell 8%. The problem: these figures missed already elevated forecasts, turning what would normally be a standout quarter into a reason to reduce exposure.
Gary Tan, portfolio manager at Allspring Global Investments, noted that investors appear to be cutting risk ahead of a combined test of AI spending and market liquidity. The reaction suggests that strong demand alone may no longer support valuations without repeated earnings surprises.
Big Tech faces a capital-efficiency test
All eyes are now on Microsoft and Meta, which report after the US market close on Wednesday. Their results will be judged less on headline revenue than on cloud growth, capital expenditure, and evidence that generative-AI products can offset rising infrastructure costs. Cash-flow concerns surrounding Alphabet and Tesla had already unsettled investors last week.
The MSCI Asia-Pacific gauge excluding Japan fell about 1% in early trade and was heading for an 8% monthly decline, while the Nikkei was on course to lose more than 10% in July. The sell-off looks less like a rejection of AI than a repricing of how quickly it must deliver. Companies spending heavily without a clear improvement in margins may find investors increasingly unwilling to wait. For context, similar dynamics have been seen in other sectors, as noted in our coverage of SanDisk's sharp decline.
Oil and the Fed add pressure
Geopolitical tensions and monetary policy uncertainty compounded the market's woes. Brent crude rose about 3% to $87.80 a barrel in early trade and later hovered near $88 after Iran launched ballistic missiles at US forces and joint US-Saudi strikes hit Iran-backed groups in Iraq. The flare-up revived concerns over the Strait of Hormuz and the inflationary impact of tighter energy supplies.
The Federal Reserve concludes its meeting on Wednesday, with markets assigning roughly a one-in-three chance to a rate increase. Frank Flight, macro strategist at Citadel Securities, warned that investors may be underestimating the central bank's hawkish shift and argued that firmer energy prices could tip a finely balanced decision towards a hike. This leaves Asian markets exposed on two fronts: AI earnings must justify stretched expectations, while the Fed must avoid delivering a policy shock into an already fragile risk trade. For more on the broader tech rout, see our analysis of the Nikkei and Kospi plunge.
Outlook
The current sell-off underscores a critical juncture for the AI trade. Investors are no longer satisfied with strong demand; they want proof that massive capital spending on data centers and chips is generating durable returns. With the Fed's decision and Big Tech earnings on deck, Asian markets face a volatile week ahead. For a deeper dive into the factors driving the Kospi's retreat, read our piece on Samsung and SK Hynix earnings risks.
This article is for informational purposes only and does not constitute financial advice.
