Tech stocks plunge globally as AI chip faith fades

Global stock markets fell sharply on Monday and into early Tuesday morning as investors lost faith in the artificial intelligence chip trade. TSMC, one of the world's largest chipmakers, dropped 7.29% after an earnings call that disappointed traders, while Netflix fell 9.24% overnight on disappointing results. The sell-off cascaded across regions: Japan's Nikkei 225 index fell 4.03%, South Korea's KOSPI fell 6.37%, and U.S. chip stocks including Intel, Micron, AMD, and Marvell all declined in overnight trading. The KOSPI's sharp drop was partly amplified by the fact that half the index's weight rests in just two stocks—Samsung and SK Hynix—and because South Korea has allowed retail investors to buy leveraged ETFs that magnify trading swings. In the U.S., S&P 500 futures were down 0.66% this morning, following a 0.51% decline yesterday. Europe's Stoxx 600 was down 0.7% in early trading.

The underlying concern driving the selloff is investor doubt about whether the AI chip business can live up to its valuation. Analysts now regard the sector as overbought, suggesting that years of enthusiasm have run ahead of actual AI revenue generation. Torsten Sløk, a top analyst at Apollo Global Management, outlined a specific risk: hyperscalers—the large cloud providers like Amazon, Google, and Microsoft—have committed to enormous data center construction budgets based on the assumption that their AI models will generate strong revenues. But if those revenues fall short due to price competition from Chinese models and open-source alternatives, earnings will disappoint. That in turn could trigger a pullback in capex spending. The implications are severe. Sløk notes that AI-related capital spending is currently the only thing keeping U.S. corporate investment positive; without it, corporate investment would be negative. A cut to hyperscaler capex could therefore hobble economic growth. "The bottom line is that AI has been the one thing holding up both the economy and markets, and with so much riding on so few names, a slower payoff wouldn't just be a sector problem, it would risk tipping the economy into recession and the S&P 500 into a correction," he said.

Not all strategists are pessimistic. UBS Wealth Management's Charlie Anderson forecasts that the S&P 500 will hit 7,900 by the end of the year. He argues that the market is transitioning from a macro-headline-driven environment to one driven by micro fundamentals—i.e., actual company earnings. "We've gone from a market driven by macro headlines to one increasingly driven by micro fundamentals. That's a healthier environment for long-term investors because it rewards companies executing well rather than simply benefiting from liquidity," he said. His outlook rests on the belief that investors will eventually look past current geopolitical tensions (including the war and its impact on oil prices, which remained in the mid-$80s) and inflation fears, and focus instead on which companies are delivering earnings growth. If hyperscalers do prove able to monetize their AI investments, Anderson's scenario could unfold. If not, Sløk's recession warning becomes the more likely path.

The sell-off reflects a fundamental reassessment of the AI chip business after years of unchecked enthusiasm. TSMC and Netflix's disappointing earnings served as a wake-up call that the revenue growth underlying massive capital spending may not materialize at the pace investors have assumed. The broader concern, articulated by Apollo's Sløk, is a timeline mismatch: hyperscalers have committed to enormous data center construction budgets on the premise that AI models will generate robust revenues, but price competition from Chinese competitors and open-source alternatives could undermine those projections. If that happens, earnings will disappoint and hyperscalers may slash capex—a move with outsized economic consequences because AI investment has become the primary driver of U.S. corporate spending.

The geographic breadth of the decline underscores how concentrated this bet has become. South Korea's market, weighted heavily toward semiconductor manufacturers Samsung and SK Hynix, fell 6.37% in a single day, amplified by the country's retail investor leverage through ETFs. Japan's Nikkei 225 fell 4.03%. These are not minor wobbles but substantial repricing. Meanwhile, UBS's forecast of a 7,900 S&P 500 by year-end suggests that some strategists still believe the market will recover once investors shift attention from macro risks (war, inflation fears) to micro fundamentals—i.e., which companies are actually executing and delivering returns on their AI bets. The outcome hinges on whether hyperscalers' AI revenues prove strong enough to justify continued capex, or whether a shortfall triggers the economic slowdown Sløk warns about.