(July 17): Taiwan stocks fell into a technical correction on Friday, amid broad losses in Asia’s chip sector as Taiwan Semiconductor Manufacturing Co’s (TSMC) results stoked worries over heavy spending and a weaker outlook for profitability.

Shares of TSMC fell 7.3% in Taipei after the world’s largest contract chipmaker raised its spending and revenue projections for the year. While the results were largely seen as positive, some analysts and investors highlighted worries over rising costs in addition to fatigue over the years-long artificial intelligence (AI) boom.

The decline dragged Taiwan’s Taiex down 6.5%, taking its decline from a June high to nearly 11%. Foreign funds sold US$5.8 billion (RM23.8 billion) worth of shares on a net basis on Friday, the most on record, Bloomberg compiled data showed. 

A Bloomberg index of Asian chip stocks tumbled more than 6%, led by losses in Kioxia Holdings Corp, a Japanese flash memory maker whose shares have lost half of their value in recent weeks.

The market was also caught off guard by Chinese AI pioneer Moonshot’s new model, which it says performs on a par with leading offerings from OpenAI and Anthropic PBC, fuelling concerns that training advanced AI models may require fewer chips.

Stocks falling in the wake of good results “means the market is looking to rotate out of chips and into other things, at least for now”, said Leonid Mironov, a portfolio manager at Gavekal Capital Ltd. “Also the multiples have gotten stretched, so Kioxia going down 50% doesn’t even make it cheap yet,” he added.

TSMC, the key maker of Nvidia Corp chips, now expects to spend US$60 billion to US$64 billion in 2026, at least US$4 billion higher than previously forecast. Typically, higher capex would be seen as good news, especially for the recipients of that spending. But even big TSMC suppliers including Japan’s Lasertec Corp and Taiwan’s Globalwafers Co dropped in the wake of the results.

Morgan Stanley attributed the additional spending partly to cost inflation from higher equipment prices, noting some disappointment over the negative impact on TSMC’s margins.

Others point to overheating and inflated valuations, with TSMC’s shares still up nearly 50% on the year. The stock is trading at 19 times forward earnings estimates, compared with the five-year average of less than 18 times.

“The sell-off may suggest that sentiment toward chip stocks is shifting following their sizeable year-to-date rally, with some investors questioning whether current valuations leave sufficient room for further upside, even in the face of solid earnings,” said James Ooi, a market strategist at Tiger Brokers.

Concerns reverberated across the region. Chip-heavy indexes including Japan’s Nikkei 225 Stock Average and China’s Star 50 Index slid more than 5% each Friday. South Korean markets were closed for a holiday.

Worries over the AI rally have been exacerbated of late by a leverage-fuelled boom driving record volatility in South Korea. At the same time, fears are mounting over a potential flood of new capacity in China that could weigh on memory-chip prices.

Still, “the structural AI demand case hasn’t changed”, according to Dilin Wu, a strategist at Pepperstone Group Ltd.

“TSMC’s numbers were genuinely strong across every metric that matters,” she said. “I think this is positioning, valuation, and a few real but non-fatal concerns hitting a market that was already priced for perfection.”

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