South Korea’s stock market has plunged after months of extraordinary gains driven by enthusiasm for artificial intelligence, memory chips and the companies supplying global data centres.
The benchmark KOSPI index fell as much as 12.6% during trading on July 29, triggering a 20-minute market-wide halt. It recovered part of the loss but still closed approximately 6% lower, following a decline of almost 11% during the previous session. The two-day rout erased a substantial portion of the market’s earlier gains and deepened a correction that began after the index reached a record in late June.
At one stage, the value lost from Seoul-listed equities since the market’s peak reached approximately $2.18 trillion. The KOSPI had fallen almost 40% from its high in just over a month, putting it on course for its steepest monthly decline on record. Despite that collapse, the market remained strongly positive for 2026 because of how rapidly it had risen earlier in the year.
The fall was not caused by one disastrous earnings report or proof that AI demand had disappeared. It resulted from extremely high expectations, concentrated investment in chipmakers and the forced unwinding of heavily leveraged positions.
SK Hynix Reported Record Results—and Its Shares Still Fell
SK Hynix became the immediate focus of the sell-off after announcing its second-quarter financial results.
The company reported record quarterly revenue of 79.3 trillion won and operating profit of 60.5 trillion won. Revenue increased 257% from the same period a year earlier, while operating profit rose 557%. SK Hynix said continued investment in AI infrastructure had increased demand for high-bandwidth memory, server DRAM and enterprise solid-state drives. Its complete figures are available in the company’s official second-quarter earnings announcement.
Those numbers would normally be considered exceptionally strong. However, investors had already priced in even greater growth. The results fell short of some analyst forecasts, and the company did not provide enough additional commitments on shareholder returns and future customer agreements to satisfy a market built around extremely optimistic assumptions.
SK Hynix shares fell 9.6% at the close after dropping nearly 20% during the session. Samsung Electronics closed 5.2% lower after falling by as much as 14%. Because the two semiconductor companies represented nearly half of the KOSPI’s market capitalisation, their declines pulled the broader index sharply lower.
The reaction illustrated a central problem within highly valued technology markets: strong earnings are not always enough. When prices already assume near-perfect growth, any result that merely meets or narrowly misses expectations can trigger selling.
The AI Rally Had Become Extremely Concentrated
South Korea benefited greatly from the global race to build AI data centres. Advanced models need enormous quantities of specialised memory, particularly the high-bandwidth memory used alongside powerful AI processors.
SK Hynix emerged as one of the leading HBM suppliers, while Samsung remained a major producer of memory and other semiconductors. Investors seeking exposure to the AI expansion therefore concentrated heavily on the two companies.
SK Hynix said it had begun mass shipments of HBM4 during the second quarter and secured long-term agreements with around ten important customers. It also said additional requests for memory supply were continuing as major technology companies expanded their AI infrastructure. These disclosures suggest that the underlying business has not suddenly collapsed.
The market problem was concentration rather than an immediate disappearance of demand. Large amounts of money were directed towards the same small group of stocks, pushing valuations higher and making the whole index increasingly dependent on semiconductor sentiment.
When confidence weakened, investors attempted to exit the same positions simultaneously. The limited number of buyers made each wave of selling more disruptive.
Leveraged Funds Magnified the Decline
Retail investors played a major role in the earlier rally. Many used borrowed money or single-stock leveraged exchange-traded funds to increase their exposure to SK Hynix and Samsung Electronics.
A two-times leveraged fund generally attempts to produce twice the daily movement of its underlying stock. When the stock rises by 5%, the fund aims to gain approximately 10% before fees and tracking differences. When the stock falls by 10%, the same product may lose approximately 20%.
These funds must rebalance frequently to maintain their targeted exposure. During a steep decline, fund managers may have to sell additional shares or derivatives. Brokers can also close positions belonging to investors who no longer have enough collateral to cover their losses.
That creates a feedback loop. Falling prices cause leveraged funds and margin accounts to sell, the additional selling pushes prices lower, and the next decline creates another round of liquidation.
Analysts interviewed by Reuters about the Korean market rout largely described the collapse as a liquidity and sentiment event rather than evidence of a sudden deterioration in semiconductor fundamentals. Several said the most heavily leveraged and crowded positions were experiencing the largest declines.
Circuit Breakers Temporarily Stopped Trading
The size of the intraday decline activated South Korea’s first-stage circuit breaker.
Under Korea Exchange rules, the first circuit-breaker stage can be triggered when the KOSPI remains at least 8% below its previous closing level for one minute. Trading is then suspended for 20 minutes to provide investors with time to evaluate the market more calmly.
Further stages exist when the index falls by 15% and 20%, subject to additional conditions. A circuit breaker does not reverse losses or guarantee that buyers will return. It temporarily interrupts trading to slow disorderly price movements.
The July 29 halt was particularly striking because the KOSPI had already experienced repeated trading curbs during the preceding weeks. On July 8, the index entered bear-market territory after falling more than 20% from its June record, while volatility in Samsung and SK Hynix had already raised concerns about leveraged investment products.
Foreign Selling and Thin Liquidity Made the Swings Larger
Foreign investors had taken profits from South Korean equities as the AI trade became increasingly crowded. Their withdrawals placed pressure on both chip stocks and the Korean won.
At the same time, market participation declined as volatility increased. When fewer institutional buyers are willing to trade, even a moderate sell order can move prices more sharply. Reuters reported unusually light volumes during parts of the rout, indicating that potential buyers had largely stepped away.
Retail investors had previously helped support falling prices by purchasing shares sold by foreign institutions. During the latest decline, however, many individual investors were also attempting to exit or were being forced out of leveraged positions.
The result was a market with many urgent sellers and too few buyers prepared to absorb the available shares.
South Korean Officials Are Restricting Leveraged ETFs
The severity of the decline has produced an unusually direct response from policymakers.
Finance Minister Koo Yun-cheol and Financial Services Commission Chairman Lee Eog-weon apologised publicly for the introduction of single-stock leveraged ETFs, acknowledging that the risks had not been considered carefully enough. The products had been introduced only months before the rout and quickly attracted investors seeking amplified exposure to chipmakers.
The government subsequently announced that individual investors would be limited to placing no more than 20% of their investment assets in single-stock leveraged ETFs. Authorities also plan to raise trading costs for excessive activity, require simulated trading exercises and introduce a 30 million won minimum deposit requirement.
New listings and promotions of these products have already been suspended, while regulators have promised continuous monitoring and the use of additional market-stabilisation measures when necessary.
These restrictions may reduce future speculative activity, although they cannot immediately eliminate positions that are already being unwound.
The AI Boom Has Weakened, but It Has Not Disappeared
The phrase “AI boom fades” describes investor enthusiasm more accurately than actual demand for AI equipment.
Concerns are growing about whether technology companies can continue spending enormous amounts on data centres without placing pressure on debt levels and free cash flow. Investors are also considering competition from Chinese AI developers and improvements that may allow models to operate with fewer computing resources.
However, SK Hynix continues to report rising demand, higher memory prices and additional customer requests. Its record revenue and profitability show that the AI infrastructure market remains commercially significant.
The change is that investors are no longer willing to treat every AI-linked company as certain to exceed expectations indefinitely. The market is moving from unquestioned optimism towards greater scrutiny of valuations, spending plans, contracts and shareholder returns.
The Correction May Continue Even When Fundamentals Remain Strong
Analysts disagree over how close the sell-off is to ending. Some believe most leveraged positions must be closed before the market can stabilise. Others view the decline as a rotation away from overcrowded technology shares and towards financial, healthcare, consumer and industrial companies.
The KOSPI could therefore remain volatile even without another negative corporate announcement. Margin calls, fund rebalancing and nervous retail trading can continue affecting prices after the original concern has been absorbed.
South Korea’s market rout does not prove that the global AI industry has failed. It demonstrates what can happen when genuine technological growth becomes mixed with extreme expectations, concentrated ownership and borrowed money.
The country’s chipmakers remain central to the AI supply chain. The question is no longer whether they are profitable, but whether their future growth can justify the extraordinary prices and financial risks created during the market’s rapid rise.
