Woofun AI reports that a severe sell-off engulfed Asian equity markets, driven by intensifying concerns over the sustainability of artificial intelligence capital expenditure and specific credit risks associated with Nvidia (NVDA.O). The downturn was further exacerbated by fears regarding intensified competition within the AI supply chain, leading to a broad-based decline in investor sentiment across the region.

The Nikkei 225 index suffered a daily decline of more than 4%, marking its lowest level since May 22, while the broader Tokyo Stock Exchange index recorded a maximum drop of 2.7%. In South Korea, the KOSPI index fell by 8%, a move severe enough to trigger a circuit breaker mechanism that halted trading for 20 minutes. Prior to this halt, the Korea Exchange had already activated the KOSPI sidecar mechanism, effectively suspending programmatic selling of KOSPI futures to curb the rapid downward momentum.

Semiconductor and equipment manufacturers led the market decline, with stocks such as Tokyo Electron, Kioxia, Samsung Electronics, and SK Hynix each dropping by more than 9%. SK Hynix experienced the most dramatic collapse, with its stock price plummeting by as much as 30%, representing the largest single-day drop in the company's history. Kioxia also saw a significant decline of 18%, marking its steepest fall since November last year, as the global sell-off of semiconductor shares intensified.

Woofun AI data shows that within a wave of AI-related transactions valued at over $750 billion, the cost of default insurance for Nvidia surged, signaling heightened financial risk. Hideyuki Ishiguro, Chief Strategist at Nomura Asset Management, noted that following reports of these significant investment transactions involving Nvidia, its credit risk has risen, which investors are interpreting as a bearish signal for the broader technology sector.

Ishiguro further highlighted that China's advancements in semiconductor manufacturing equipment pose a growing threat to Japanese suppliers, who have long held a competitive advantage in this critical field. This geopolitical shift adds another layer of uncertainty to the supply chain dynamics, compounding the financial concerns surrounding major tech firms and their exposure to regional manufacturing capabilities.

The market declines reflect deepening concerns about crowded stock positions and rising corporate debt levels during the rapid advancement of AI infrastructure. Jung In Yun, CEO of Fibonacci Asset Management Global, observed that the recent sell-off in semiconductor stocks appears to be driven more by a sharp deterioration in market sentiment rather than any direct changes in fundamentals, with investors increasingly questioning whether the pace of AI infrastructure spending can be sustained.

Chris Larkin of Morgan Stanley ETrade warned that the upcoming week is filled with potential surprises, both positive and negative. He identified geopolitics and oil prices as the biggest variables, noting that optimism about strong earnings from the seven major tech companies is not guaranteed, especially if AI spending levels continue to surprise investors with their scale and impact on profitability.

Kyle Rodda, Senior Analyst at Capital.com, emphasized in a client report that these companies embody the key themes currently affecting market sentiment: excessive capital expenditure and spending by AI companies. Investors are increasingly worried that such aggressive spending will erode returns, leading to a reassessment of valuations across the technology sector as the market digests the implications of these financial commitments.

This week, several top tech companies, including Meta Platforms Inc. (META), will announce key earnings, with earlier news of Meta's plan to sell excess AI computing power raising 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, adding to the uncertainty surrounding supply chain stability and cost management.

Investors are also awaiting Samsung Electronics' complete performance for the June quarter, with Kim Minji, a portfolio manager at Must Asset Management in Seoul, noting that the world's largest traditional memory chip manufacturer is catching up with SK Hynix in the HBM sector. Although SK Hynix is expected to announce another record quarter on Wednesday, investor sentiment has clearly weakened, with core market concerns focusing on persistently rising memory prices potentially forcing 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 significantly, now ranking second only to SpaceX (SPCX) globally in terms of market capitalization changes, reflecting the intense pressure on high-growth tech valuations.

In just over a month, approximately $470 billion in market value has disappeared from SK Hynix, transforming it from one of the hottest AI trades globally into 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," despite the broader market turbulence.

However, Oh also noted that the market is reducing stock positions ahead of the earnings season for U.S. tech companies, indicating a cautious approach among investors. The market expects SK Hynix's sales for the June quarter to more than double year-on-year, reaching approximately $57 billion, with operating profit expected to increase sixfold year-on-year, yet the anticipation of these figures has not prevented the recent sell-off.

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, serving as a sentiment barometer for the global AI hardware sector. He noted that market expectations have largely been priced in, so "even a slight miss could trigger a severe reaction," highlighting the fragile state of investor confidence in the AI narrative.

Hebe Chen, Senior Market Analyst at Vantage Global Prime, concluded that 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, marking a pivotal moment for the AI investment thesis.