Global equities fell to their lowest level in a month on Tuesday as investors accelerated a selloff in semiconductor stocks amid mounting concerns over China’s rapidly advancing chip industry, the growing cost of financing the artificial intelligence boom, and increasing expectations that the U.S. Federal Reserve could raise interest rates as early as this week.

The broad risk-off move was led by Asian technology shares, where heavily valued semiconductor companies suffered steep losses after months of extraordinary gains, while lower oil prices and shifting geopolitical risks added another layer of uncertainty for investors.

The MSCI All Country World Price Index fell 0.5% to its lowest level since June 29, reflecting broad weakness across global equity markets.

The sharpest declines came from South Korea, where the benchmark KOSPI tumbled more than 10% to a three-month low, triggering a circuit breaker during trading. The benchmark is now on course for its worst monthly performance on record, surpassing losses recorded during the 1997 Asian financial crisis.

The correction marks a dramatic reversal for one of the world’s best-performing equity markets. The KOSPI had more than tripled over the 12 months through June as investors poured money into AI-linked semiconductor stocks. Since reaching that peak, however, the index has lost more than one-third of its value as investors rapidly unwind leveraged positions and take profits.

Chipmakers were at the center of the selloff.

Shares of SK Hynix and Samsung Electronics each plunged more than 12%, extending a sharp correction that has erased a significant portion of their AI-driven gains.

The weakness spread beyond Asia. U.S. chipmakers Nvidia and Micron Technology fell in premarket trading after Nvidia had already lost 5% overnight.

Investor sentiment toward Nvidia deteriorated after The Wall Street Journal reported that the company was discussing providing roughly $250 billion in financing guarantees for OpenAI as part of a massive data center expansion project.

The report reinforced growing concerns that the next phase of the AI race may require enormous capital commitments from technology companies, potentially weighing on profitability even as demand for AI infrastructure remains robust.

Analysts say investors are increasingly scrutinizing whether the industry’s extraordinary earnings growth can justify soaring valuations and escalating capital expenditure.

“You’ve seen the companies paying for AI, the hyperscalers, not really participating because of concerns about the cost and the degree of leverage that needs to be taken on. And now we’re seeing questions over the profitability of the semiconductor space, particularly in Asia,” said Dorian Carrell, head of multi-asset income at Schroders.

“The broader AI story has some way to go, but these kinds of (profit) growth rates are rarely sustained. We think that it’s healthy that the market’s questioning these things.”

Fresh competitive pressure from China also weighed heavily on semiconductor stocks.

Dutch chip equipment manufacturer ASML dropped 8.5% after The Information reported that China has begun manufacturing domestically developed immersion deep ultraviolet (DUV) lithography machines, technology that ASML has long dominated globally.

The development raises the prospect that China is making meaningful progress toward reducing its reliance on Western semiconductor equipment amid ongoing U.S. export restrictions.

Investor concerns were amplified after Chinese memory chipmaker CXMT Corp. completed an $8.6 billion stock market listing on Monday. The company ended its first trading session as China’s most valuable listed company, highlighting investor confidence in Beijing’s efforts to build a self-sufficient semiconductor industry.

The developments have intensified fears that Chinese companies could eventually challenge the dominance of established global semiconductor manufacturers across key segments of the industry.

European equities proved comparatively resilient.

Strong corporate earnings from Unilever and Mercedes-Benz helped offset weakness in technology shares, allowing European markets to outperform their Asian counterparts.

Meanwhile, investors continued to monitor the outlook for U.S. monetary policy ahead of the Federal Reserve’s interest rate decision on Wednesday. Markets are pricing roughly a 35% probability that policymakers will raise interest rates by 25 basis points this week, with expectations for further tightening continuing to support the U.S. dollar.

The euro remained under pressure, trading below the $1.14 level at $1.1370, while the Japanese yen hovered near a four-decade low at 163.83 per dollar. The yen’s weakness has heightened speculation that Japanese authorities could intervene in foreign exchange markets if the Bank of Japan keeps interest rates unchanged and the currency depreciates further.

“If BOJ communication is not hawkish enough and USD/JPY heads higher, traders should anticipate an official response, including verbal intervention, rate checks, or even direct FX market intervention, perhaps on Friday,” said Thierry Wizman, currency and rates strategist at Macquarie Group.

Geopolitical developments also remained a key driver of market sentiment.

Oil prices extended their sharp decline after President Donald Trump said the United States was having “good talks” with Iran, fueling optimism that negotiations could reduce tensions following Washington’s suspension of air strikes over the weekend.

Brent crude futures fell more than 3% to $85.55 per barrel, extending Monday’s nearly 9% decline as traders reduced the geopolitical risk premium built into oil markets.

The easing in oil prices contributed to a decline in U.S. Treasury yields, with the benchmark 10-year yield falling about four basis points to 4.64% on Monday. However, shorter-dated Treasury yields remained relatively stable, reflecting investor caution ahead of the Fed’s policy announcement.

According to Wizman, developments in the Middle East remain central to the global economic outlook because of their influence on energy prices and inflation.

“The U.S.-Iran war, by propelling the price of crude oil, remains the most important determinant of what will happen to the global economy … and, by extension, what informs central bank policy outlooks, at the margin,” he said.

“We expect that the (Fed) this week will wish to adopt a tightening bias.”

The combination of rising interest rate expectations, uncertainty over AI-related spending, growing Chinese competition in semiconductors and lingering geopolitical risks has prompted investors to reassess some of the market’s biggest winners.

While enthusiasm surrounding artificial intelligence remains intact over the long term, analysts say the recent volatility reflects a shift toward greater scrutiny of valuations, financing requirements and the sustainability of earnings growth across the sector.

The artificial intelligence-driven stock market rally is entering a new phase as investors shift away from the technology giants that have dominated gains over the past two years and toward companies using AI to improve efficiency, cut costs and drive earnings growth.

The rotation reflects a broader expansion of the bull market, with investors moving beyond the semiconductor makers and cloud computing companies that have been at the center of the AI boom into sectors that have lagged but are now expected to benefit from adopting the technology.

At the same time, some of the market’s biggest AI winners, including Nvidia and Microsoft, have faced increased volatility as investors assess whether massive spending on AI infrastructure will generate returns quickly enough to justify lofty valuations.

“The market is beginning to rotate toward quality, a classic mid-cycle transition as the business cycle matures,” Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, wrote in a research note first quoted by Business Insider.

“From here, margin expansion is likely to depend less on early-cycle operating leverage and more on AI adoption, reinforcing our quality thesis.”

The changing market leadership comes after months of sharp swings in AI-related stocks. Semiconductor companies have experienced heightened volatility, with several of the sector’s biggest names giving up gains as investors reacted to concerns over competition from Chinese firms, questions about AI spending, and elevated valuations.

Analysts at Piper Sandler described the trend as a “mega-rotation” away from the technology sector and toward more defensive areas of the market. Analysts at Citigroup argued that the era of the “Magnificent Seven” dominating market performance has begun to fade.

Morgan Stanley believes the next stage of the AI investment cycle will increasingly reward companies that deploy artificial intelligence across their operations rather than those primarily supplying the underlying technology.

According to Wilson, businesses are already reporting measurable gains from AI implementation.

“Our systematic transcript analysis shows that 25% of S&P members cited measurable benefits from AI adoption in calendar 2Q, versus 14% a year ago,” he said.

The bank expects AI adoption to become a significant contributor to corporate profitability over the next several years.

“We continue to view AI adoption as an important source of earnings growth and operating leverage, with roughly 100 basis points of net margin expansion expected through 2027 related to adoption.”

Morgan Stanley’s “AI Adopter Screener” highlights companies that it believes are well positioned to benefit from integrating artificial intelligence into their businesses. The list includes Alphabet, Roblox, Dick’s Sporting Goods, CVS Health, Shopify, Apple, and Constellation Energy.

The bank said industries often viewed as vulnerable to disruption from AI, including transportation, software and services, and professional services, could instead emerge among the biggest beneficiaries as companies use the technology to improve productivity and reduce operating costs.

Investment manager Vanguard also sees investors broadening their exposure beyond the dominant AI infrastructure providers.

According to Vanguard senior economist Shaan Raithatha, investors are increasingly scrutinizing whether the enormous capital expenditures being made by AI “hyperscalers” such as Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle will generate sufficient returns in an increasingly competitive environment.

“The dominant narrative is that investors are increasingly questioning whether the large investments committed by the AI hyperscalers will deliver sufficient returns amid elevated expectations and intensifying competition,” Raithatha said.

He added that investors are still expected to allocate capital across the broader AI ecosystem, including companies supplying critical semiconductors and memory chips. However, he warned that those areas are likely to remain volatile, particularly as Chinese competitors increase pressure on U.S. and South Korean chipmakers.

Vanguard said the next chapter of the AI investment story will be determined less by spending on computing infrastructure and more by whether businesses across industries can translate AI into measurable productivity gains.

“The next phase of the AI story is more about whether current investment translates into productivity gains for the broader global economy,” the firm said.

“History tells us that over time, the benefits of general-purpose technologies spread throughout the economy from the sector that drove the initial innovation.”

The evolving outlook suggests investors are increasingly looking beyond the companies building AI models, chips and data centers and focusing on firms capable of converting artificial intelligence into higher margins, stronger earnings growth and sustained competitive advantages.