A crack in the AI capital expenditure bubble is violently puncturing the valuations of chip stocks.

Global chip stocks experienced a massive sell-off on Tuesday, as a triple threat of doubts over AI capital expenditure returns, concerns about Nvidia's "circular financing" model, and rising competition from Chinese memory chip makers triggered a "Black Tuesday" that spread from Wall Street to the Asia-Pacific markets.

South Korea's stock market bore the brunt of the sell-off. The Kospi index plunged 10.76%, its largest single-day drop since 1998, triggering a circuit breaker for the eighth time this year after falling more than 8% during the session. SK hynix plummeted 14%, while Samsung Electronics fell 13.58%. Japan's markets also came under pressure, with the Nikkei 225 index closing down 4%. Kioxia fell 18%, and both Tokyo Electron and Nikon dropped over 9%.

The Direct Catalyst: Waning Patience for AI Returns

The immediate trigger for this sell-off is the market's dwindling patience for tech giants to deliver returns on their AI capital expenditures. The shockwaves from Alphabet's post-earnings decline of over 7% last week, despite reporting a record quarterly profit, have yet to subside. Meanwhile, a "circular financing" model involving Nvidia's AI infrastructure deals, which exceed $750 billion, is facing scrutiny from the credit markets. This is compounded by the listing of Chinese DRAM leader CXMT (ChangXin Memory Technologies), which is prompting a reassessment of the competitive landscape. These multiple negative factors are weighing heavily on chip stocks.

AI Spending Concerns Persist as Earnings Season Pressure Mounts

The root of this sell-off lies in the wavering confidence that massive AI investments will generate reasonable returns. Last week, Alphabet raised its full-year 2026 capital expenditure forecast to between $195 billion and $205 billion, triggering investor alarm. The Philadelphia Semiconductor Index subsequently fell for three consecutive days, and Monday's US market close saw further declines, with AMD and Nvidia among the top losers in the S&P 500. The combined capital expenditure of the four tech giants—Alphabet, Microsoft, Meta, and Amazon—is projected to reach $700 billion this year, with Wall Street forecasting it could exceed $1 trillion by 2027. Investors are finding it increasingly difficult to determine when and how these investments will translate into tangible profits. Kyle Rodda, a senior analyst at Capital.com, stated in a report, "These companies embody the core pressure on current market sentiment—excessive capital spending by AI companies, and investors fear it will erode returns." A dense schedule of risk events this week is further amplifying the market's nervous reaction. Microsoft, Meta, Apple, and Amazon are set to release earnings, while the Federal Reserve, the Bank of Japan, and the Bank of England will all announce interest rate decisions. Over 170 companies in the S&P 500 will report results this week. Chris Larkin of E*Trade from Morgan Stanley noted, "Even if the 'Magnificent Seven' deliver strong earnings, the market may not be satisfied, especially as questions about AI spending levels persist." Dilin Wu, a strategist at Pepperstone Group Ltd., concluded, "The bar is currently very high. Beating expectations no longer guarantees a stock price increase. We've seen this repeatedly. Part of today's sell-off may be traders actively reducing positions ahead of earnings."

Nvidia's CDS Surges as 'Circular Financing' Concerns Mount

Another key trigger for the market crash is the "circular financing" concern stemming from Nvidia's unprecedented scale of AI infrastructure deals. According to sources familiar with the matter, Nvidia is in talks with OpenAI to provide approximately $250 billion in financing guarantees to secure data center computing power, and is also discussing financing for a $350 billion project to purchase chips for OpenAI. Combined with the previously announced over $500 billion partnership with the SK Group, the total value of AI infrastructure deals potentially involving Nvidia now exceeds $750 billion. The core of the market's concern lies in the "circular" nature of this model—Nvidia provides financing or guarantees to its clients, who in turn purchase Nvidia's chips. If AI demand falls short of expectations, the losses along the entire chain would be amplified. Gary Tan, a portfolio manager at Allspring Global Investments, remarked, "More and more capital is being used to fund future AI clients and infrastructure deployment." This concern first ignited in the credit markets. According to ICE Data Services, Nvidia's five-year credit default swap (CDS) rose by approximately 14 basis points during the session to around 82 basis points, the largest intraday increase since the contract began active trading in November last year. CDS prices for Oracle, Alphabet, Amazon, Meta, and Broadcom have also surged to new highs. Manish Kabra, Head of US Equity Strategy at Societe Generale, stated bluntly, "For hyperscalers, we should be looking at CDS, not EPS. AI capital expenditure is still outpacing cash generation, pushing free cash flow for tech groups toward cycle lows." Nvidia CEO Jensen Huang has a different view of the "circular financing" concerns. He stated in January, "The idea that this is circular financing—it's simply absurd." He believes these investments not only drive Nvidia's own business but can also generate investment returns. However, this statement has clearly failed to convince the credit market.

An Overwhelming Supply of AI Debt Triggers Bond Market Opposition to Expansion

The credit market is also sounding the alarm. In the first half of this year, US investment-grade corporate bond issuance exceeded $1.2 trillion, the highest since 2021, with hyperscale cloud service providers contributing about $200 billion. Lukasz Labedzki, a fixed income analyst at Franklin Templeton Institute, pointed out that this supply, combined with the US government's massive borrowing needs, creates a dual pressure. AI-related bond spreads have widened significantly recently. According to Bloomberg data, the spread on 10-year AI debt is around 121 basis points, higher than the overall high-grade corporate bond spread of about 80 basis points. The yield on the 30-year US Treasury bond has remained above 5% for several consecutive weeks, the longest stretch since 2007. Oracle is in the most precarious position. After announcing it would spend $70 billion on data center construction over the next year, S&P Global downgraded its credit rating to BBB-, just one notch above junk status. Moody's also revised its outlook for the company to negative. Alphabet's free cash flow turned negative for the first time in over two decades last quarter, and its CDS subsequently rose to a record high of 67 basis points. The latest financing cost for Meta's $12 billion data center project in Texas is approaching levels seen in junk bonds. John Aylward, Chief Investment Officer at Sona Asset Management, stated that the debt is "pricing at a level consistent with current B- rated bonds... which is a rather shocking situation." David Brown, Co-Head of Global Investment Grade at Neuberger Berman, posed the core question facing the market: "The biggest suspense is whether this level of capital expenditure will permanently increase, and when we will see the turning point back to positive cash flow. We won't have an answer in the short term, which explains the current weakness."

Chinese DRAM Leader's IPO Reignites Competition Concerns

Another trigger for the chip stock crash came from changes in the competitive landscape of China's memory chip market. China's largest DRAM chip manufacturer, CXMT (ChangXin Memory Technologies), made its debut on the Shanghai Stock Exchange's STAR Market on Monday. Its shares closed up over 465% on the first day, giving it a total market capitalization exceeding 3.28 trillion yuan, making it the largest company by market cap on the A-share market. The IPO raised approximately 57.9 billion yuan (about $8.6 billion), making it the largest IPO in Asia this year. Global investors are now reassessing the competitive outlook for the DRAM industry over the next few years. The market fears that with CXMT's successful large-scale financing, its capacity expansion and technological development capabilities will significantly improve, potentially leading to an earlier-than-expected intensification of competition in the traditional DRAM business, thereby compressing industry profit margins. According to Reuters, Han Ji-young, an analyst at Kiwoom Securities in South Korea, noted that this sell-off combines multiple factors, including AI infrastructure financing risks, the impact of China's low-cost open-source AI models on expectations for computing power demand, and competition concerns from CXMT's listing. However, most analysts believe the market's reaction is somewhat overdone. CXMT's products are currently mainly concentrated in traditional DRAM areas like DDR4 and DDR5, while the fastest-growing profit segments for Micron, SK hynix, and Samsung come from AI storage products like HBM. Bernstein analyst Mark Li believes the sector correction actually presents an opportunity for positioning, predicting that global memory chip market revenue could still surpass $1.3 trillion by 2027-2028.

The Week Ahead: A Dual Test of Earnings and Central Bank Decisions

The market has defined this week as a concentrated stress test. Microsoft, Meta, Amazon, and Apple will report quarterly earnings on Wednesday and Thursday, while over 170 companies in the S&P 500 report results this week. Simultaneously, the Federal Reserve, the Bank of Japan, and the Bank of England will all announce interest rate decisions. In Asia, SK hynix and Samsung will also be among the first to report. The key focus of the earnings season is singular: can AI investments be validated? According to Bloomberg, citing UBS Global Wealth Management, "Limited visibility on capital expenditure beyond 2027, combined with increased investor demand for spending discipline, is likely to continue suppressing risk appetite." There is also an unexpected variable on the monetary policy front. According to Bloomberg, Citadel Securities expects the Federal Reserve to surprise the market with a rate hike this week. In a note, its macro strategy head, Frank Flight, wrote that a 25-basis-point hike on Wednesday would strengthen Chair Kevin Warsh's credibility on fighting inflation and signal that policymakers will no longer rely on fully pre-announcing every policy move. Traders are currently pricing in about a one-in-three chance of a Fed rate hike this week. Flight stated, "The market may again be underestimating the degree of the Fed's hawkish shift." Chris Larkin of E*Trade from Morgan Stanley summarized the current situation: "This is a week full of potential surprises, both positive and negative. Geopolitics and oil prices could be the biggest wildcards, but even if the 'Magnificent Seven' deliver strong earnings, the market may not be impressed, especially as questions about AI spending levels persist."