Kospi plunges 11%, Nikkei 225 drops 3%: why are Asian markets cracking?

Asian stocks extended a punishing sell-off on Wednesday as record chip earnings failed to calm doubts over the price investors are paying for the artificial-intelligence boom.

South Korea remained at the centre of the retreat, while a jump in oil and an unusually uncertain Federal Reserve decision added fresh pressure.

The market is no longer questioning whether AI demand is strong. It is asking whether profits can keep beating expectations that have risen even faster.

Microsoft and Meta results later in the day will offer the next answer, with investors seeking proof that vast spending on data centres and chips is producing durable returns.

Record profits no longer satisfy the AI trade

South Korea’s Kospi dropped 11% by midday after losing more than 10% on Tuesday, while SK Hynix sank 12.6% and Samsung Electronics fell 8%. Japan’s Nikkei lost nearly 3% and Taiwan’s Taiex slid 3.6%.

SK Hynix reported record second-quarter revenue of 79.32 trillion won and operating profit of 60.54 trillion won, driven by premium memory products and strong AI demand.

Yet the figures missed elevated forecasts, turning what would normally be a standout quarter into another reason to cut exposure.

Allspring Global Investments portfolio manager Gary Tan said investors appeared to be reducing risk before a combined test of AI spending and market liquidity.

The reaction suggests strong demand may no longer support valuations without repeated earnings surprises.

Big Tech faces a return-on-capital test

Microsoft and Meta are scheduled to report after the US market closes on Wednesday.

Their results will be judged less on headline revenue than on cloud growth, capital expenditure and evidence that generative-AI products can offset rising infrastructure costs.

Cash-flow concerns surrounding Alphabet and Tesla had already unsettled investors last week.

The MSCI Asia-Pacific gauge excluding Japan fell about 1% in early trade and was heading for an 8% monthly decline, while the Nikkei was on course to lose more than 10% in July.

The sell-off looks less like a rejection of AI than a repricing of how quickly it must deliver.

Companies spending heavily without a clear improvement in margins may find investors increasingly unwilling to wait.

Oil and the Fed raise the stakes

Brent crude rose about 3% to $87.80 a barrel in early trade and later hovered near $88 after Iran launched ballistic missiles at US forces and joint US-Saudi strikes hit Iran-backed groups in Iraq.

The flare-up revived concerns over the Strait of Hormuz and the inflationary impact of tighter energy supplies.

The Fed concludes its meeting on Wednesday, with markets assigning roughly a one-in-three chance to a rate increase.

Citadel Securities macro strategist Frank Flight said investors may be underestimating the central bank’s hawkish shift and argued that firmer energy prices could tip a finely balanced decision towards a hike.

That leaves Asian markets exposed on two fronts: AI earnings must justify stretched expectations, while the Fed must avoid delivering a policy shock into an already fragile risk trade.