EDITORIAL: Putting the tech sell-off in perspective

The TAIEX is under intense pressure as it edges closer to a technical correction. Extending the grim sentiment from late last month’s tech sell-off, the benchmark index on Monday plunged 800 points intraday before closing down 0.65 percent at 44,920 points, its lowest since Aug. 24 and below the critical 45,000-point support level. The heavy selling is fueled by anxiety over returns on artificial intelligence (AI) capital expenditure rather than deteriorating corporate fundamentals. Investors were also closely watching yesterday’s US midterm elections and their potential impact on equity markets.

Taiwan Semiconductor Manufacturing Co (TSMC) stock took severe hits over the past few days, dragging the broader index well beyond its 120-day moving average. TSMC shares shed 1.69 percent to close at NT$2,330 on Monday, the lowest since Aug. 4. Nevertheless, the world’s largest foundry service provider delivered a blowout third quarter, reporting a record-high net profit of approximately NT$763 billion (US$23.29 billion), a 69 percent jump year-on-year and an 8 percent increase from the previous quarter. The chipmaker attributed the stellar growth to insatiable demand for cutting-edge chips used in AI and high-performance computing applications.

The foundry backs virtually all major AI accelerator developers. TSMC pushed back against growing market skepticism regarding the profitability and long-term sustainability of the technology buildup. During an earnings call last month, the chipmaker again anchored investor confidence by highlighting a structural shift in the industry: the transition from AI chatbots to advanced assistants, which is unlocking a powerful new wave of demand driven by agentic AI.

ASE Technology Holding Co, the world’s leading semiconductor packaging and testing provider, echoed TSMC’s bullish stance on the AI boom. The company last week disclosed that soaring customer demand for next-generation advanced packaging had severely outpaced capacity. To bridge the supply gap, ASE revised its full-year capital expenditure forecast for the third time this year to a record-breaking US$11.5 billion. The aggressive expansion in facilities and equipment underscores its growth trajectory. The massive capital outlay is projected to keep ASE’s free cash flow in negative territory through next year.

However, lower-than-expected capital expenditure figures from Microsoft Corp and a weaker earnings report by Alphabet Inc, Google’s parent company, severed a critical pillar of market confidence for Taiwan’s AI and electronics ecosystem. Because the TAIEX is structurally dependent on upstream semiconductor and AI hardware orders, a pullback in capital spending by large cloud service providers in the US could trigger a downward revision in revenue projections for Taiwanese suppliers.

Microsoft’s capital spending rose 30 percent to US$45.2 billion, but came in below Wall Street’s US$50.7 billion estimate. While Alphabet maintained its ambitious full-year capital expenditure forecast of about US$200 billion, investors were spooked by the search giant’s negative cash flow of US$9.07 billion last quarter. This rare liquidity drain fueled growing anxiety over the financing costs of continued AI expansion. More critically, it intensified pressure on the company to prove that its aggressive AI spending can translate into near-term financial returns.

It is essential to discern what triggered the technology share sell-off. Was it deteriorating core fundamentals, anxieties over aggressive AI capital expenditures or temporary supply chain friction? During its earnings call, Microsoft said that its spending miss stemmed from third-party data center bottlenecks rather than a drop in demand, CNBC reported. Microsoft said that delays from third-party graphics processing unit capacity providers temporarily constrained infrastructure rollouts, pushing the deployment of new computing capacity into the first half of next year.

AI demand remains “extremely strong,” according to TSMC’s assessment from last month, amid supply chain bottlenecks. Most Taiwanese AI supply chain partners report no significant shift in customer behavior as they aggressively expand capacity to alleviate supply constraints. Since late last year, leading chipmakers and outsourced assembly and test service providers — including TSMC, United Microelectronics Corp, ASE and Powertech Technology Inc — have been striving to scale up capacity to fulfill surging AI demand. Specifically, Powertech is focusing on panel-level fan-out packaging technology to meet the advanced requirements of its AI chip customers.

Given solid AI demand, the global tech sell-off should have a limited, short-term impact on Taiwanese hardware manufacturers, as long as orders remain robust. The critical drivers dictating Taiwanese supply chains are not near-term stock fluctuations, but rather Nvidia Corp’s earnings report, the US midterm elections, Anthropic’s expected debut on the NASDAQ this month and progress in building data centers in the US.