“AI investments have obviously been very high, but the rally across various tech indices around the world has been insane. We still need to wait and watch regarding the profitability achieved by AI integration and when these steep AI investments may provide returns. But for now, profits do not reflect enough returns from the massive AI investments, so we do not have the fundamentals to back this rally. Today’s crash reflects foreign investors suddenly pulling out funds from the market,” the research head of a domestic investment firm said.

Impact felt across markets

Other Asian markets also inched lower following the crash in the South Korean market. Japan’s Nikkei 225 index ended 3.6% lower. Taiwan’s Taiex, another index with heavy AI influence due to chipmaker TSMC, lost 1.3%.

The aftershocks of the crash were also felt in the Indian market. The BSE’s Sensex index, which was trading nearly flat at around 11:40 PM, crashed nearly 600 points in a 45-minute window. At 2:15 PM, the index traded 563.39 points or 0.7% lower at 76,530.68. The National Stock Exchange’s Nifty 50 index was down 0.8% at 23,906.90.

The decline was broad-based, with nearly 70% of the stocks traded on the NSE in the red. IT stocks were among the biggest drags on the benchmark indices, with the likes of TCS, Wipro, and Infosys all down around 3%.

Futures contracts of US indices such as Nasdaq Composite and S&P 500 also fell as much as 2% after the crash, indicating a fall when they open for trading late Tuesday.

Warning bells for AI

A few global firms had already sounded warning bells for AI. Jefferies had warned that Elon Musk-backed SpaceX’s IPO could be the peak of the euphoria surrounding AI. SpaceX’s public issue, alongside other big-ticket pending issues such as those of OpenAI and Anthropic, could suck out liquidity from other stocks, with AI-related stocks that had seen the highest incremental flows of late facing the biggest risk.

“The pending IPOs raise the obvious question whether this marks the peak of AI euphoria. It could well do. The almost infantile glee with which some grown adults rave about their experiences playing with AI clearly raises that possibility, as does the commencement of the reaction against tokenmaxxing,” Jefferies’ global head of equity strategy Christopher Wood wrote earlier in the month.

The Elon Musk-backed space exploration company debuted in the US market on June 12 at an eye-watering valuation surpassing $2 trillion. Having gained nearly 50% initially, it has now lost over 23% over the last three sessions.