Korean Stocks Near Bear Market as AI Rally Pauses, Leading Asian Decline

South Korea's equity market experienced a sharp downturn, briefly flirting with bear market territory as the record-setting rally in artificial intelligence (AI)-focused chipmakers took a breather. This development led to significant losses across broader Asian markets. Seoul's benchmark Kospi index fell from the open due to intense profit-taking, at one point losing as much as 8.2%, briefly putting it into a bear market, defined as a 20% drop from its recent high. This steep decline heightened concerns among market participants about whether expectations for AI technologies had become excessively priced.

The selling wave on Tuesday triggered circuit breakers on the Kospi index, halting trading for 20 minutes. This marked the sixth time this year that circuit breakers were activated on the index, underscoring the high volatility in semiconductor stocks. Heavily weighted chipmakers, including Samsung Electronics (005930), saw their shares tumble between 6.9% and 9.75%, despite the company projecting a 19-fold jump in its second-quarter operating profit. Similarly, SK Hynix (000660) shares fell between 6.1% and 10.58%. Analysts noted that investors are not abandoning the AI story but are questioning whether a sector priced for perfection can continue to deliver perfection into earnings season.

The decline in South Korea spread to other major Asian markets. Japan's Nikkei 225 index closed between 1.3% and 2.1% lower, with chip equipment makers like Tokyo Electron also experiencing losses. Hong Kong's Hang Seng Index dropped between 0.6% and 0.7%, China's Shanghai Composite Index lost between 1.2% and 1.3%, and Taiwan's Taiex index declined between 1.1% and 2.3%. This divergence occurred even as rebounding AI stocks on Wall Street pushed the S&P 500 closer to record highs, indicating a regional, sector-specific dynamic rather than a broader shift in global risk sentiment.

Despite the recent slump, the Kospi index remained among the world's best-performing major stock indexes this year, having advanced between 76% and 100% year-to-date. However, the market's heavy reliance on two major chip producers, Samsung Electronics and SK Hynix, makes it highly sensitive to potential issues in the AI spending cycle or supply chain. Foreign investors were significant net sellers in June, offloading over $10 billion worth of Kospi shares, which contributed to the market's decline.

Industry analysts largely view the recent semiconductor correction as a short-term breather rather than a prolonged industry downturn. AI infrastructure, including semiconductors, IT hardware, and power equipment, is still expected to drive the stock market in the second half of the year. The consensus suggests that memory supply will remain tight through 2027, and concerns about a slowdown in AI capital expenditure are considered overblown. While short-term volatility is seen as inevitable, the fundamentals of the semiconductor industry are believed to remain solid, supported by the memory market outlook and ongoing AI demand.