A massive sell-off in semiconductor stocks ripped through Asian markets on Thursday, erasing billions in market value as investors fled the crowded artificial intelligence trade. The rout was led by South Korea, where the benchmark Kospi index plunged more than 4.5%, with memory chip titans SK Hynix and Samsung each surrendering roughly 10% during the session.
The sell-off was sparked by a deepening reassessment of whether the staggering sums wagered on AI infrastructure can justify the sector's lofty valuations. The pain in Asia followed a bruising session on Wall Street, where SK Hynix's American depositary receipts tumbled 9% on Wednesday, signaling the carnage to come. MSCI's broadest index of Asia-Pacific shares outside Japan slumped 1.7%, while Japan's Nikkei 225 dropped over 2% as the tech-heavy bourses bore the brunt of the retreat.
Compounding the market jitters, crude oil extended its relentless climb. Brent crude futures rose for a fourth consecutive day, pushing past $85 a barrel, after the United States launched fresh strikes on Iran. The escalating hostilities have all but torpedoed a June interim peace deal and revived fears that energy supplies from the Persian Gulf could be severely disrupted. President Donald Trump has pledged to intensify the bombardment until Tehran stops attacking ships in the Strait of Hormuz and agrees to reopen the critical waterway.
"There's no near-term pressure on the Fed, but oil is in the driver's seat over the longer term," said David Russell at TradeStation. "Energy saved the day in June, but that might become ancient history if the Strait of Hormuz doesn't open soon."
AI Doubts Resurface as Earnings Bar Proves Too High
The semiconductor sector, which had powered much of the global equity rally this year, found itself under the microscope again. The Philadelphia Semiconductor Index had surged roughly 83% this year, stretching valuations to levels that left no room for error. Even positive earnings news failed to ignite buying interest.
Dutch equipment giant ASML, which manufactures the cutting-edge lithography machines essential for advanced chip production, reported a rise in second-quarter net profit and raised its full-year sales forecast. Yet its shares finished 0.4% lower. The tepid response underscored just how high the bar has been set for the sector.
"Seeing aggressive pullback in Memory/Hardware," Brian Heavey, an equity trader at JPMorgan, said in a note. "Don't think there's a smoking gun 'negative' headline driving semis/hardware selloff. I think just shows how high the bar is for semis earnings."
Stephen Innes of SPI Asset Management echoed that sentiment, noting that investors are not "suddenly questioning whether AI infrastructure demand exists" but rather "questioning how much of that demand has already been paid for in the share price." He added, "The numbers can still be excellent and the stocks can still fall. Once expectations have been pushed into the rafters, even a good result can arrive looking short."
All eyes now turn to Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker, which is scheduled to report quarterly earnings later on Thursday. TSMC is expected to post a 59% surge in net profit for the April-June period, marking its fifth consecutive quarter of record earnings. The results are seen as a critical litmus test for the health of the AI buildout.
"Semis staged a constructive recovery after another bruising start, but the SOX still ended lower by roughly 2%. Whether that bounce has any durability remains an open question heading into Asia, where chips will again be under the microscope after several sessions of volatile price action," said Brendan Fagan, macro strategist at Bloomberg Markets Live.
Bonds Rally on Cooler Inflation, Korea Hikes Rates
While equities struggled, bond markets found a bid. Australian and New Zealand government bonds opened higher, tracking gains in US Treasuries after a softer-than-expected US producer price index (PPI) report for June. The data, which showed prices slipping 0.3% month-on-month thanks to lower energy costs, followed a benign consumer inflation reading earlier in the week.
The back-to-back inflation surprises prompted traders to drastically scale back wagers on Federal Reserve interest rate increases this year. The probability of a rate hike this month collapsed to just 10%, down from 43% earlier in the month. Two-year Treasury yields edged up slightly to 4.1493% after falling 14 basis points over the prior two days, while the US dollar index steadied near 100.48 after two days of losses.
However, analysts cautioned that the inflation relief could prove fleeting. The renewed hostilities between the US and Iran, which have seen oil prices climb 12% this week alone, threaten to reignite price pressures just as central banks were gaining confidence in their battle against inflation.
In a notable monetary policy move, the Bank of Korea raised interest rates for the first time since 2023, lifting the benchmark rate to 2.75%. The decision, which was largely expected, aims to stabilize a slumping won and counter persistent inflationary pressures in an economy buoyed by strong chip exports. The South Korean won strengthened slightly against the dollar following the announcement.
Markets at a Glance
Hong Kong's Hang Seng Index stood out as a rare bright spot, climbing more than 1% as Chinese chip firms, which have been beaten down this year, enjoyed a counter-trend advance. The divergence highlighted a rotation within the sector, with investors hunting for value in names that had missed out on the AI frenzy.
On currency markets, sterling held gains after surging more than 1% against the greenback on Wednesday. Reports that Home Secretary Shabana Mahmood, viewed as more market-friendly, is a frontrunner to become the next finance minister bolstered confidence in UK assets. The pound was last trading at $1.3538. The yen hovered at 162.08 per dollar, not far from a 40-year low, as speculators remained wary of potential intervention by Japanese authorities.
Wall Street had managed to eke out gains overnight as investors rotated out of semiconductors and into Magnificent Seven stocks like Apple, Amazon, and Meta, along with bank shares following robust earnings from major lenders. But Asia, with its heavier exposure to semiconductor stocks, proved far more vulnerable to the chip sell-off.
The confluence of geopolitical turmoil in the Middle East, stretched tech valuations, and the looming uncertainty of TSMC's earnings report created a perfect storm for Asian equities. As the AI trade that had propelled markets to record highs this year shows signs of fatigue, the question facing investors is whether this is a healthy correction or the start of a deeper unwind.