The Japanese and South Korean stock markets have collapsed! The Nikkei fell over 4%, and the KOSPI plummeted 8%. The market panicked ahead of the AI giants' earnings report week

On Tuesday morning, affected by concerns related to Nvidia's (NVDA.O) significant AI supply agreements and intensified market competition, investor sentiment was dampened, leading to a lower opening and decline in the Japanese and South Korean stock markets.

As of the time of publication, the Nikkei 225 index fell more than 4% during the day, reaching its lowest level since May 22; the Tokyo Stock Exchange index saw a maximum decline of 2.7%. The South Korean KOSPI index's decline expanded to 8%, triggering a circuit breaker mechanism and halting trading for 20 minutes. Earlier, the Korea Exchange also activated the KOSPI sidecar mechanism, suspending programmatic selling of KOSPI.

Semiconductor and equipment stocks such as Tokyo Electron, Kioxia, Samsung Electronics, and SK Hynix led the decline, each dropping more than 9%. Among them, SK Hynix's stock price plummeted by as much as 30%, marking the largest single-day drop in history; Kioxia's stock price fell by 18%, the largest drop since November last year. As the global sell-off of semiconductor stocks intensified, investor sentiment regarding the sustainability of the AI boom continued to deteriorate.

In a wave of AI-related transactions valued at over $750 billion, the cost of default insurance for Nvidia surged, causing tech stocks to decline. Hideyuki Ishiguro, Chief Strategist at Nomura Asset Management, stated that following reports of significant investment transactions involving Nvidia, its credit risk has risen, which investors view as a bearish signal.

Additionally, Ishiguro pointed out that China's advancements in semiconductor manufacturing equipment pose a threat to Japanese suppliers, who have long held a competitive advantage in this field.

These declines indicate that market concerns about crowded stock positions and rising corporate debt levels during the advancement of AI construction are deepening.

"The recent sell-off in semiconductor stocks seems to be driven more by a sharp deterioration in market sentiment rather than any direct changes in fundamentals," said Jung In Yun, CEO of Fibonacci Asset Management Global. "Investors are increasingly questioning whether the pace of AI infrastructure spending can be sustained."

Chris Larkin of Morgan Stanley E*Trade stated, "This week is filled with potential surprises, both good and bad. Geopolitics and oil prices may be the biggest variables, but optimism about the strong earnings from the seven major companies is not guaranteed, especially if AI spending levels continue to surprise."

Kyle Rodda, Senior Analyst at Capital.com, wrote in a report to clients, "These companies embody the key themes currently affecting market sentiment—excessive capital expenditure and spending by AI companies, with investors worried that this will erode returns."

This week, several top tech companies, including Meta Platforms Inc. (META), will announce key earnings. Earlier this month, news of Meta's plan to sell excess AI computing power has raised market concerns about demand. Apple Inc. (AAPL) has issued warnings about cost pressures and reports suggest it is lobbying for approval to purchase memory components from competitors.

Investors are also awaiting Samsung Electronics' complete performance for the June quarter. Kim Minji, a portfolio manager at Must Asset Management in Seoul, stated that the world's largest traditional memory chip manufacturer is catching up with SK Hynix in the HBM sector.

Moreover, although SK Hynix is expected to announce another record quarter on Wednesday, investor sentiment has clearly weakened. The core market concern is that persistently rising memory prices may force customers to reduce procurement and seek lower-cost alternatives.

Since hitting an all-time high in June, SK Hynix's stock price has fallen by 38%, with market worries about overcrowded trading and leveraged funds amplifying stock price volatility. In this round of adjustments, the company's market value has shrunk, second only to SpaceX (SPCX), ranking globally.

In just over a month, approximately $470 billion in market value has disappeared from SK Hynix. Once regarded as one of the hottest AI trades globally, this South Korean memory chip company is now becoming one of the most controversial subjects in investors' portfolios.

Shawn Oh, head of cash equity business at NH Investment & Securities, stated in a research report that considering the current valuation attractiveness and the ongoing deleveraging of retail investors in South Korea, SK Hynix remains "an extremely attractive buy." However, he also noted that the market is reducing stock positions ahead of the earnings season for U.S. tech companies.

The market expects SK Hynix's sales for the June quarter to more than double year-on-year, reaching approximately $57 billion; operating profit is expected to increase sixfold year-on-year. However, James Ooi, a market strategist at Tiger Brokers, stated that the significance of SK Hynix's earnings report may have already transcended the company itself.

"SK Hynix's performance may also serve as a sentiment barometer for the global AI hardware sector," he said, noting that market expectations have largely been priced in, so "even a slight miss could trigger a severe reaction."

Hebe Chen, Senior Market Analyst at Vantage Global Prime, stated: "The recent sell-off of chip manufacturers indicates that concerns about spending, returns, and valuations are deepening rather than dissipating. With several major catalysts approaching, the hesitation to buy on dips suggests that investors are waiting for stronger evidence before rebuilding risk."
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