The South Korean stock market, after experiencing one of the most remarkable rallies in global capital markets, is now facing a critical stress test. On Friday morning, the Korea Composite Stock Price Index (KOSPI) plunged by as much as 6.4% intraday, marking one of its largest single-day drops this year, before paring some losses. The dual plunge of over 7% in the market's two pillar memory chip giants, Samsung Electronics Co Ltd and SK Hynix Inc, triggered a wave of panic selling. Due to a surge in futures selling pressure, the Korea Exchange even temporarily activated a programmatic trading halt mechanism to curb market volatility.
This sharp decline occurred against a backdrop of simultaneous adjustments in the global semiconductor sector. The previous day, the U.S. Philadelphia Semiconductor Index (SOX) retreated significantly following disappointing AI business guidance from Broadcom, sparking investor concerns about overheated valuations in the artificial intelligence (AI) supply chain, which rapidly spread to Asian markets. However, compared to a normal correction in the U.S. market, South Korea faces a more complex set of issues: an index overly reliant on a few chip stocks, rapidly expanding leveraged capital, and potential monetary policy tightening risks are converging.
AI Frenzy Fuels a "Super Bull Market"
As of Thursday this week, the KOSPI index had gained over 100% year-to-date, ranking it among the world's best-performing major equity markets. The driving force behind this bull run has been almost entirely from the AI supply chain. Benefiting from the explosion in demand for High Bandwidth Memory (HBM), SK Hynix Inc and Samsung Electronics Co Ltd have become the primary beneficiaries of global AI infrastructure development. As a key HBM supplier to Nvidia, SK Hynix Inc has seen its stock price surge over 250% this year, while Samsung Electronics Co Ltd has gained nearly 200% over the same period. Market research indicates that these two companies contributed to nearly three-quarters of the KOSPI's gains this year, with their combined weight in the index rising to around 54% and their trading volume constituting nearly half of the market's total turnover. This highly concentrated rally, while driving the index to successive record highs, has also rendered the market exceptionally fragile. Ha Seok-Keun, Chief Investment Officer at Eugene Asset Management in Seoul, stated, "The biggest risk currently is not a deterioration in fundamentals, but overheated positioning. The market is highly likely to enter a phase of high volatility and consolidation over the next one to two months."
Leveraged ETFs Act as an "Accelerant"
More concerning for the market is the emergence of leverage amplification in the Korean capital market, reminiscent of past bull market peaks. In late May, the Korea Exchange approved the listing of 16 single-stock leveraged and inverse ETF products based on Samsung Electronics Co Ltd and SK Hynix Inc. These products quickly attracted massive inflows. Data shows that within just five trading days of their launch, the trading volume of these products accounted for 21% of the entire Korean ETF market's turnover; some products saw cumulative trading value exceed 28 trillion won in three days. Concurrently, the total trading volume of leveraged ETFs centered on these two chip giants approached 37 trillion won in a matter of days. Kenny Kim, CEO of Meridian One Asset Management, pointed out, "The current market structure is vulnerable to downside shocks, as a significant portion of trading is driven by the short gamma mechanism of leveraged ETFs." This so-called "short gamma effect" means forced buying during rallies and rapid selling for hedging during declines. This mechanism tends to amplify market volatility, causing moves that far exceed changes in fundamentals.
Retail Enthusiasm Cools While Margin Debt Hits Records
Another warning signal comes from the capital structure. Data from the Korea Financial Investment Association shows that as of May 22nd, deposits in investor brokerage accounts had decreased to 121 trillion won from 137 trillion won mid-month. In other words, the pace of new capital inflows is slowing. However, at the same time, margin debt has continued to soar. By the end of May, margin loan balances in the Korean market reached a record high of 38 trillion won, an increase of over 10 trillion won from the end of 2025. Shawn Oh, a trader at NH Investment & Securities, noted, "Cash cushions are shrinking, but leverage levels keep rising." This indicates that the market's advance is increasingly reliant on borrowed funds rather than fresh capital inflows. Historical experience suggests this structure is often a significant precursor to increased market turbulence. Korean financial regulators have previously publicly warned that excessive margin trading and leveraged investments could become sources of financial stability risk.
Potential Bank of Korea Rate Hike Looms as Next Challenge
The real test for the market may arrive in July. As South Korea's economic growth, semiconductor exports, and trade surplus continue to improve, the new Governor of the Bank of Korea has recently signaled a more hawkish policy stance. The market widely expects the Bank of Korea could initiate interest rate hikes as early as next month. For a market with increasingly prominent debt-driven characteristics, rising interest rates imply: higher borrowing costs, reduced attractiveness of leveraged trades, slowing ETF inflows, and pressure on high-valuation growth stocks. Seo Sang-young, a strategist at Mirae Asset Securities, stated, "The Korean stock market is extremely sensitive to bond yields because a significant portion of investment behavior relies on borrowed funds."
Market Outlook and Underlying Fundamentals
From a fundamental perspective, South Korea's chip industry remains at the core of the global AI investment wave, and the leading advantages of Samsung Electronics Co Ltd and SK Hynix Inc in the HBM field are difficult to challenge in the short term. However, from a market structure perspective: excessive index concentration, rapid expansion of leveraged ETFs, record-high margin balances, slowing new retail capital inflows, and rising rate hike expectations collectively indicate that the Korean stock market is transitioning from a "one-way rally phase" into a "high-volatility game phase." For investors, market movements in the coming weeks may determine whether this AI-driven super bull market is merely experiencing a mid-cycle pause or the beginning of a deeper correction.
Despite the clear increase in market volatility, international investment banks remain optimistic about the long-term prospects of the Korean stock market. This week, Goldman Sachs significantly raised its 12-month target for the KOSPI from 9,000 points to 12,000 points, implying approximately 37% upside from current levels. Goldman Sachs believes: the AI-driven memory chip super-cycle is still in its early stages; HBM supply remains tight; Korean corporate earnings growth is far exceeding market expectations; and over 60% of listed Korean companies remain undervalued. Goldman Sachs also acknowledged, "Samsung Electronics Co Ltd and SK Hynix Inc already account for over half of the market capitalization. The market has clear concentration risks, and a short-term correction is not surprising."
It is noteworthy that SK Hynix Inc is currently advancing plans for a U.S. listing, receiving positive feedback from international investors. The market views this as a move that could further enhance the influence of South Korea's AI industry chain in global capital markets.
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