The global artificial intelligence trade is coming under increasing pressure, with a deepening selloff in chip stocks instilling fresh doubts about the sustainability of one of the most powerful investment themes of recent years.

Shares tied to the AI boom have been hit as concerns over intensifying competition from China, rising interest rates, stretched valuations and the enormous cost of building AI infrastructure converge. South Korea’s Kospi Index plunged 5.5% on Tuesday, while the Philadelphia Semiconductor gauge has fallen more than 7% from this month’s high.

With the earnings season underway, investors are scrutinizing whether the billions being poured into chips, data centers and computing infrastructure will generate sufficient returns to justify the sector’s breakneck rally, particularly amid bubble warnings from some market veterans such as Ray Dalio.

“Investors are jittery and looking for excuses to take profit on AI-related stocks that have outperformed this year, especially memory stocks,” said Vey-Sern Ling, a managing director at Union Bancaire Privee. “The excuses are not new, but nobody wants to stand in front of a stampeding herd. Sell first, ask later is the mood.”The latest sell triggers came from China’s CXMT Corp. declaring it achieved a breakthrough in chip technology that rivals had pursued for years, which undermined the case to be bullish on its global memory peers.

Adding to the jitters were comments from Broadcom Inc. Chief Executive Officer Hock Tan, who likened the strategies of some investors drawn to the AI boom to gambling, and warned the sector can face funding constraints.

“The outlook is challenging for the AI trade. It is tough,” said Hao Hong, chief investment officer at hedge fund Lotus Asset Management. Market participants are worried CXMT “is going to increase capacity of the industry and create a price war,” he added.

The Kospi took the biggest hit in Asia on Tuesday, with shares of memory giants Samsung Electronics Co. and SK Hynix Inc. dropping about 7% and 10%, respectively. Korea’s benchmark is now down a third from the record high it reached in June and below its 200-day moving average. Taiwan’s Taiex gauge fell about 2%.

To be sure, similar concerns have rattled AI stocks in the past, only for the rally to regain momentum as investors continued to bet on the technology’s transformative potential. New AI models released from the likes of Meta Platforms Inc. will also increase the need for computing, making memory chips ever more critical.

Yet one thing is clear: the risks surrounding the AI trade have continued to pile up, raising questions about how much longer investors will be willing to look past them.

Signs of caution are everywhere. The rush to finance AI is rattling investors in the more than $10 trillion US corporate market, sparking a repricing of risks around some of the biggest technology companies. Meanwhile, JPMorgan Chase & Co. and Goldman Sachs Group Inc. have taken a rare step of limiting their exposure to a loan for AI startup Volta Infrastructure Holdings Ltd.

In Asia, the collapse of Nvidia-backed data center operator Firmus Grid Ltd.’s initial public offering is making investors far pickier about AI infrastructure deals that hinge on future earnings.

The timing of the latest selloff is also significant, coming just as companies prepare to report earnings that could offer fresh clues on whether the massive investments in AI are paying off. ASML Holding NV and Taiwan Semiconductor Manufacturing Co. are among firms due to report this week.

“The AI machine is still running at full speed, but its fuel — capital — is getting increasingly expensive,” Hebe Chen, an analyst at Vantage Global Prime. With Wednesday’s US inflation data the next key risk, “a tactical rotation towards defensive positions looks increasingly sensible,” she added.