Asian stocks deepened their rout on Wednesday, extending a vicious selloff fueled by anxiety over AI valuations and concerns about whether massive spending in the sector will yield returns. This apprehension comes ahead of critical earnings reports from major tech firms and a U.S. Federal Reserve policy decision. South Korea's KOSPI, which had more than tripled in the 12 months leading up to June, plummeted over 11% to its lowest point since early April, after already dropping more than 10% on Tuesday. Taiwan stocks fell 5%, while Japan's Nikkei slid 2.6%. MSCI's broadest index of Asia-Pacific shares outside Japan was down over 2.45% after a 3.6% loss on Tuesday. Shares of SK Hynix fell 9% as the chipmaker's quarterly operating profit, while sixfold higher, missed lofty expectations.

Adding to the market's volatility is the impending U.S. Federal Reserve policy decision. The Fed's stance on interest rates remains a close call, especially under the new Chair Kevin Warsh's "no-guidance" regime. Traders are pricing in a 33% chance of a rate hike. Ahead of the decision, the U.S. dollar was near a one-month high. Despite the general expectation that the central bank will likely keep rates steady, some strategists, like Frank Flight, head of macro strategy at Citadel Securities, believe the market might be underestimating a hawkish shift and that a moderate increase in energy prices could tip the decision toward a hike this week.

The decline in Asian markets has been primarily driven by a repricing of "high-beta winners," particularly those heavily leveraged to semiconductors and AI infrastructure. Patrick Munnelly, market strategy partner at TickMill, noted that investors are shifting from an "AI spending is good" mindset to questioning if "AI spending needs to earn its cost of capital." This sentiment has led to significant drops in companies like Kioxia Holdings (down 18.33%), Sumco Corporation (down 16.53%), and Lasertec (down 14.05%) in Japan, and LG Innotek (down 16.29%), Hybe Corporation (down 16.09%), and SK Telecom (down 16.04%) in South Korea. The Korea Exchange even halted Kospi trading for 20 minutes after an 8% drop.

While some markets saw a rebound on Wednesday, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.8% and Japan's Nikkei gaining 1%, the overall climate remains one of caution. South Korea's KOSPI also recovered slightly, gaining over 1% in early trading. However, the broader trend indicates a significant monthly drop for July, with MSCI's index on track for a 6.6% decline and Japan's Nikkei bracing for a 10% fall. The upcoming earnings reports from "Magnificent Seven" members like Microsoft and Meta later in the day are expected to provide a crucial test for the AI trade, especially after Alphabet and Tesla's recent negative cash flow reports spooked investors.