World stocks hit a one-month low as investors divested from chipmakers globally, driven by anxieties surrounding Chinese competition and the financing of the AI boom. The tech-heavy Nasdaq Composite dropped 1.37% on Tuesday, with major chip companies experiencing significant declines, including Micron sliding 11.7%, Nvidia dropping 1.7%, and Intel shedding 8.5%. This downturn erased more than a third of the value gained by AI-linked stocks since their peak in June, following a stellar rally throughout the year.
The sell-off in chip stocks intensified across Asia, with South Korea's KOSPI plunging over 10% to a three-month low, triggering a circuit breaker and heading for its largest monthly fall on record. Memory chipmakers SK Hynix and Samsung Electronics saw their shares drop over 12%. This rout was partly triggered by reports that China began manufacturing domestically developed immersion deep ultraviolet lithography machines, and Chinese chipmaker CXMT's strong stock market debut, which raised $8.6 billion and gave it a market value of around $487.73 billion, fueling competition concerns.
Analysts attributed the widespread pullback to worries over the sustainability of AI infrastructure financing and mounting competitive pressure from China. Credit-default swaps (CDS) on debt for major AI spending companies like Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom, and Nvidia reached record highs, signaling increased investor concern about the financial burden of AI investment. For instance, Oracle's five-year CDS traded at 215 basis points, up from 144 basis points at the beginning of the year, reflecting a "crisis of confidence" in credit markets due to the uncertainty surrounding AI financing.
The broader AI story is expected to continue evolving, but the market is questioning the sustainability of the rapid growth rates seen in the sector. Upcoming earnings reports from "Magnificent Seven" members like Microsoft, Amazon.com, Meta, and Apple will serve as a crucial test for the market rally, especially after Alphabet and Tesla recently disappointed investors with negative cash flow reports. The Philadelphia Semiconductor Index also fell to an over two-month low amidst this significant sector-wide correction.
