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South Korea’s stock market suffered a stunning reversal on Tuesday as the benchmark Kospi index plunged nearly 10 per cent, triggering a temporary trading halt and raising fresh concerns that the global artificial intelligence-fuelled market rally may be running out of steam.
The Kospi closed at 8,203.84, down 910.71 points, or 9.99 per cent, marking one of its sharpest single-day declines in recent years. The steep selloff prompted the Korea Exchange to activate market-wide circuit breakers, suspending trading for 20 minutes as authorities sought to contain panic selling.
The rout was led by semiconductor stocks, the biggest beneficiaries of the AI investment boom, with investors rushing to lock in profits after months of extraordinary gains.
Shares of SK Hynix tumbled more than 11 per cent, while Samsung Electronics fell over 8 per cent as concerns mounted that valuations had become disconnected from fundamentals.
The sharp correction comes just weeks after the Kospi crossed the 9,000-point mark for the first time, fuelled by optimism over surging demand for AI chips and data-centre infrastructure. South Korea’s market had emerged as one of the world’s strongest performers this year, largely thanks to the meteoric rise of memory-chip makers at the heart of the AI supply chain.
AI trade faces reality check
The selloff reflects growing investor anxiety over whether expectations surrounding AI-related earnings growth have become too ambitious.
Markets are now turning their attention to upcoming quarterly results from US memory-chip giant Micron Technology, seen as a key barometer for global AI hardware demand.
The results could help determine whether Tuesday’s selloff is merely a correction in an overheated market or the beginning of a broader reassessment of AI-linked valuations.
Warning signs had been building
Several indicators had already suggested the rally was becoming stretched.
SK Hynix had posted gains of more than 2 per cent for eight consecutive trading sessions before the crash. The stock’s year-to-date gain had approached 350 per cent earlier this week, far outpacing broader market benchmarks and even rival Samsung Electronics.
Analysts had increasingly questioned whether investor enthusiasm for AI had become concentrated in a narrow group of semiconductor stocks.
Foreign investors lead exodus
Foreign investors accelerated the downturn by aggressively reducing exposure to South Korean equities.
Overseas funds sold more than 4 trillion won ($2.6 billion) worth of Kospi shares by midday, highlighting a sharp shift in sentiment after months of heavy buying.
Domestic retail investors attempted to absorb some of the selling pressure by buying the dip, but were unable to prevent the broader market collapse.
The scale of the decline also exposed risks linked to leveraged exchange-traded funds tied to Samsung Electronics and SK Hynix. These products had amplified gains during the rally and are now magnifying losses during the correction.
South Korea’s top financial regulator has already expressed concern over the growing influence of leveraged products. Financial Supervisory Service Governor Lee Chan-jin said authorities are examining potential market-stabilisation measures after a series of violent swings linked to semiconductor-focused ETFs.
Hawkish Fed adds to pressure
Beyond concerns over AI valuations, investors are also contending with a less supportive global monetary backdrop.
Markets have been unsettled by expectations that the US Federal Reserve may raise interest rates later this year under Chair Kevin Warsh. Fed funds futures are now pricing in a strong probability of a rate hike by September as the US economy continues to show resilience.
The prospect of tighter US monetary policy has strengthened the dollar and weighed on emerging-market assets across Asia.
The dollar index remained near a one-year high, adding further pressure on Asian currencies and equity markets.
A turning point for the AI boom?
Tuesday’s market meltdown is unlikely to alter the long-term outlook for artificial intelligence, but it may signal a turning point in investor behaviour after months of relentless optimism.
The AI trade has driven extraordinary gains in semiconductor companies worldwide, helping lift stock markets from Seoul to Silicon Valley. However, the sharp decline in the Kospi highlights how dependent those gains have become on continued earnings growth and investor confidence.
With AI-related stocks accounting for an increasingly large share of market gains globally, any disappointment in earnings or demand forecasts could trigger further bouts of volatility.
For now, investors are waiting for fresh evidence that the AI spending boom remains intact. Until then, one of the world’s hottest stock market rallies has abruptly hit a wall.
With inputs from agencies.
