Tech stocks are set to nudge closer toward correction territory on Tuesday, paced to the downside by a selloff in the chip sector that is likely to cloud a crucial week on Wall Street.

The overnight slump in chips stocks, tied to reports of a key development in chipmaking technology in China as well as the increasing levels of circular financing in the broader tech sector, has the Nasdaq Composite flirting with a 10% pullback from its early June peak.

The benchmark, which is up more than 7.2% for the year, has slumped nearly 8% since June 2, and is on pace for a 10% pullback with Tuesday's premarket slide. It's also likely to record its second consecutive month of negative returns.

South Korea's KOPSI fell the most since late spring, and is now more than 33% south of its late June peak, while Japan's Nikkei 225 slumped into correction territory on Tuesday after falling 13.8% from its record high on June 22.

Reports of a China-made EUV machine, similar to the chipmaking technology created by Europe's ASML, has ignited deeper concerns over the pace of supply in the coming months.

"Following last week's mixed tech earnings, the lingering concerns about profitability, investments and the short-term outlook for AI-related firms, as well as the growing threat from cheaper China-based AI models have been playing a key role in weakening risk appetite," said Achilleas Georgolopoulos, senior market analyst at Trading Point XM.

At the same time, a worrying increase in debt protection costs for Nvidia, which jumped to the highest levels in months on Monday amid reports of its financing support for SK Group and OpenAI, added to worries over the circular nature of financing in the market's most important sector.

Nvidia shares have fallen more than 16% since their all-time highs in mid-May, and lost their title as the world's most-valuable stock to Apple, which has surged more than 22% over the past month.

Credit default swaps for Nvidia, in fact, are now trading north of those for Google parent Alphabet, and imply a 5% chance of default over the next five years, according to Matthew Sigel, head of digital assets research at VanEck.

The broader Big Tech trade is also in retreat, with an index of the so-called Magnificent Seven stocks down more than 10% from its late May peak and the PHLX Semiconductor index now in a 21% bear market slump from the highs it reached in late June.

"Investors are suffering from AI fatigue," said Ed Yardeni, founder and head of Yardeni Research.

"They've concluded that there is no way to estimate whether all the capital spending on AI infrastructure will generate good [return on investments] in the coming years," he added. "What they do know is that hundreds of billions of dollars are being spent on AI capex in the here and now."

Google's spending update last week, which boosted its 2026 capex tally to $205 billion, means that the largest AI hyperscalers, including Amazon, Microsoft and Meta Platforms, will spend around $750 billion this year.

And all three of Google's big spending cohorts will report June quarter earnings this week, starting with Meta and Microsoft on Wednesday, just hours after a key Federal Reserve policy decision that markets imply has a 33% chance of delivering a rate hike.

"The market is looking for more clarity on interest rates and AI's return on investment, and has been stuck in a narrow trading range since mid-July," said Rick Gardner, chief investment officer at RGA Investments in Raleigh, NC.

"Wednesday may be the most important day for markets in recent memory as Warsh updates on the prospects of a rate hike and big tech earnings shed light on whether or not we are finally seeing a return on investment for the massive amounts of AI spending taking place," he added.

We're not quite in "tech wreck" territory at the moment, but the next few days will either steer the market away or plow it straight into the guardrail.