South Korea's "AI bull market" shows cracks! Signs of a bubble are looming, with the Kospi index once again experiencing a sharp drop, plummeting by 4% at one point.

On Tuesday, the South Korean Composite Stock Price Index (Kospi) fell nearly 4%, becoming the worst-performing stock market in Asia. The reason for this was the impact of rising U.S. bond yields, with chip stocks following their U.S. counterparts lower, as Samsung Electronics and SK Hynix both dropped nearly 3%. As key market indicators started flashing warning signs market breadth narrowing to 33%, Kospi 200 volatility index soaring to 74.71 far exceeding levels during the COVID-19 pandemic, margin debt and derivatives margin setting new record highs simultaneously the market began to ponder whether this was "an AI-driven super cycle, or another capital bubble". Just yesterday, after opening on Monday, Kospi plummeted by 4.7%, with the cumulative decline from its May 14th high of 8114 points expanding to over 10%, briefly entering a technical correction phase. Following a sharp drop in stock index futures, the Korea Exchange triggered a circuit breaker for Kospi, halting program trading for 5 minutes. Monday's sell-off followed a dark trading day on Friday: when the Kospi index briefly surpassed the unprecedented level of 8000 points, it then sharply reversed direction, plunging by over 7% mid-day. The cumulative decline over two days exceeded 10%, with the "world's most bullish stock market" falling from the 8000-point high in just seven trading days. The surface of the feast: index surges and market capitalization surpasses The early 2026 South Korean stock market was dubbed as the "world's hottest stock market". Starting at 4300 points, Kospi crossed the 6000-point, 7000-point, and briefly touched the 8000-point milestones within just over four months. KB Securities significantly raised its year-end target price from 7500 points to 10500 points; Goldman Sachs maintained an "overweight" rating, increasing its 12-month target price from 8000 points to 9000 points; JPMorgan Chase pushed its target to 10000 points in a "bullish scenario". Supporting these optimistic expectations was an unprecedented boom in semiconductor exports. In early May (1-10), South Korea's semiconductor exports soared by a staggering 149.8% to $8.5 billion, setting a historical record for that period, accounting for 46.2% of total exports. While overall export growth was at 43.7%, the semiconductor sector single-handedly lifted the entire South Korean export economy. The first quarter also saw a historic high in total export value, growing by 37.8% year-on-year. The Korea Development Institute (KDI) has raised its economic growth forecast for 2026 to 2.5%, with about half of this figure directly driven by semiconductor exports. KDI designated 2026-2027 as an "expansion period" for the economy, signaling actual growth exceeding the potential growth rate. JPMorgan Chase further increased its full-year GDP growth forecast from 2.2% to 3.0%, while Citibank raised it to 2.9%. As for the current account balance, an annual surplus of $240 billion is expected to reach a historic peak. On the corporate earnings front, Goldman Sachs projected a 300% growth in South Korean corporate profits in 2026; KB Securities forecasted that the combined operating profits of all Kospi-listed companies would reach 91.9 trillion Korean won, nearly three times that of 2025. Just two companies, Samsung Electronics and SK Hynix, contributed 68% of this profit total. Market Cracks It is the structural feature of this "duopoly" that has planted the most hidden risks in the market. The first crack: market breadth collapse, index turns into a "chip betting table" Market breadth a critical indicator measuring the extent of individual stock participation in a rising market is sending the most glaring warning signals since 2023. As of mid-May, only 33% of Kospi constituent stocks were trading above their 50-day moving average, down from 70% three weeks prior. More alarmingly, even as the index hit new highs and briefly touched 8000 points, only 2% of constituent stocks simultaneously refreshed their 52-week highs. This "bear market rising" characteristic bears unsettling structural similarities to the peak of the 2021 global tech bubble. On May 6, when Kospi touched 7500 points, the number of declining stocks (679) exceeded the number of advancing stocks (202) by more than three times, leading to a historic rare divergence between the market value-weighted index and the equally weighted index. In other words, the "prosperity" of Kospi is becoming increasingly narrow, concentrated, and fragile. The index itself is no longer cheap, and broad investment requires hefty bets on the semiconductor cycle. First Eagle's Heck warned: "Therefore, selectivity is crucial." The second crack: "asymmetric prosperity" in valuation, material sector bubbles up While Samsung and SK Hynix are supported by record profits, sectors with lackluster earnings growth are being pushed towards the edges of a bubble. William Bratton, head of cash equities research for BNP Paribas in the Asia-Pacific region, pointed out that non-tech companies have contributed only 4% to the past 12 months' profit growth since September 2025. With profit growth almost entirely concentrated in the two major chip companies, and valuations of hundreds of other stocks soaring in tandem, structural pricing imbalances become unavoidable. The valuation of the materials sector is particularly eye-catching, with the battery materials company Posco Future M becoming the most extreme case. As of May 4, 2026, the company's earnings per share over the past 12 months were only 49 Korean won, yet the price-to-earnings ratio soared to 5408.07 times. Its market value expanded by 130.83% in a year, reaching 23.21 trillion Korean won on May 12. This made it the most "sell-rated" stock in Kospi as rated by analysts. A company with meager annual earnings, propped up by a concept in the AI and new energy industry chains, is supporting hundreds of trillions of Korean won in market value with thousands of times price-to-earnings ratio a pricing model that has hardly ever ended in a "soft landing" historically. The third crack: leveraged mutation, hidden risks in South Korea's "everyone trading stocks" Another vulnerability in the South Korean stock market comes from the unprecedented participation of retail investors in leverage. As of April 2026, South Korea's margin debt balance had surged to 34 trillion Korean won (about 178.5 billion yuan), doubling from a year ago. Margin trading as a proportion of total market turnover has soared from 18% to 35% - compared to the peak of the A-share bull market in 2015, this ratio was only 15%. The enthusiasm for leveraged trading in the derivative market has also reached its peak. As of May 7, on-exchange derivative trading margin reached 38.26 trillion Korean won, also setting a historic high, more than doubling within the first four months of the year. The balance of credit financing and investor margins is also at record levels, indicating an unprecedented influx of "long funds" expecting the market to continue rising. In such a highly leveraged market structure, once a decline triggers forced liquidation, it can create a negative spiral of "drop - liquidation - larger sell-off". Palvir Bahia, fund manager at Polar Capital managing $40.5 billion in assets, although not considering the current market a bubble, is "closely paying attention to the constantly rising margin debt, as rebounding market causes increased margin debt, exacerbating market volatility, especially on downturn days, retail investors are forced to sell stocks to maintain account balances". The fragility of this leveraged structure has already shown itself during the mid-May adjustment. Retail investors were forced to take on the massive chip assets divested by foreign investment: on just May 15th, foreign investors net sold 5.6 trillion Korean won, institutions net sold 1.7 trillion Korean won, with retail investors becoming the sole buyers, purchasing 7.2 trillion Korean won. The fourth crack: volatility index surpasses pandemic levels, foreign investors accelerate withdrawal The most convincing risk signal comes from the market's own "fear indicator". By May 15th, the Kospi 200 Volatility Index (VKOSPI) closed at 74.71 and continued to stay above 70 in the following four days. On May 13th, this index peaked at 76.16, reaching its highest level since the outbreak of the Middle East war in early March. The severity of historical comparisons lies in the fact that this volatility level has surpassed the levels during the COVID-19 market collapse in March 2020, marking the market being in a typical "melt-up" phase neither an orderly bull market, nor complete panic, but a "hot rally" driven by extreme positions and FOMO (fear of missing out). Kenny Kim, CEO of Meridian One Asset Management, pointed out that even as the market continues to hit new highs, the volatility index remains high, indicating that the market is in a "melt-up phase driven by FOMO and extreme positions", with leverage and margin trading further amplifying the volatility. He warned: "If funds from retail investors or systematic traders significantly slow down, or hedge funds reduce their profitable large positions, the market structure could become even more fragile." Meanwhile, the retreat of foreign investors is accelerating. As of mid-May, overseas investors had already net sold $11.5 billion of South Korean stocks for the month, potentially setting a record for the third largest monthly withdrawal in history. Within just two weeks from May 5th to 18th, foreign funds had cashed out over 56 trillion Korean won on Kospi. On May 15th alone, overseas investors sold a net 5.6 trillion Korean won, hitting a recent peak and directly triggering a circuit breaker in Kospi 200 futures. Fundamental Double Mirror: AI Super Cycle vs. K-shaped Imbalance The crux of the current market nature lies in the core disagreement: Is the current structural distortion a "normal form in a bull market", or "an early sign of a larger-scale bubble"? Bullish logic is rooted in the storage semiconductor super cycle driven by AI. Samsung and SK Hynix possess core technology advantages related to the AI breakout, and the valuations of both companies are still below regional and global industry averages. KDI's 2.5% economic growth forecast, historic export data for the first quarter, and the expectation of nearly $240 billion in current account surplus for the year form a solid macro fundamental support. Analysts at KB Securities emphasized that the unexpected growth in corporate earnings "effectively alleviated potential concerns about overvaluation". On the other hand, bearish warnings focus on the deepening structural imbalance of the "K-shaped" economic structure. Goldman Sachs explicitly categorized the South Korean economy as a "K-shaped" structure, indicating the growing disparity between the semiconductor super boom and sectors like consumption, construction, and small and medium enterprises in the real economy. KDI's economic growth trajectory forecast has shown concerns 3.1% (first half) 1.9% (second half) 1.7% (2027) demonstrating a clear downward trend. Once the semiconductor industry enters a downturn, the deceleration of the South Korean economy may be more severe than market expectations. The deeper issue lies in whether investing in three-fourths of Kospi driven by the business performance of just two companies still constitutes "diversified investment". Investors' answers are gradually determining the outcome of this "melt-up". Policy Dilemma: Stimulus or Cooling? For policymakers in South Korea, the current situation poses a dilemma. On one hand, inflation and real estate risks are reappearing. The South Korean finance minister has explicitly identified inflation and the real estate market as "top concerns". Markets are starting to bet on the possibility of the Bank of Korea raising interest rates after a previous loose period posing a potential "liquidity cliff" for a market highly dependent on leverage to sustain momentum. On the other hand, although KDI raised its growth forecast, the deceleration trajectory for the second half of the year and 2027 is already visible. Premature tightening of monetary policy could accelerate economic downturn, while continuing to allow leverage to expand could exacerbate pain when a correction arrives. The metaphor of RootN Global Investors' portfolio manager Mo Young captures the collective mindset of this investment: "It's like a feast you want to enjoy to the fullest but also want to exit at any moment." The problem is, in a market with entrenched leverage, extreme volatility, not all participants can exit unscathed before the feast ends. Conclusion The essence of this "melt-up" market trend in the South Korean stock market is a resonance of three factors: the AI-driven semiconductor super cycle provides a fundamental narrative; record-low interest rates and inflation combining with record margin debt expansion provide liquidity fuel; and the FOMO psychology pushes valuations from a reasonable range to the edge of structural imbalance. The abrupt volatility following the Kospi breaking 8000 points, may not be a "normal pullback in a bull market", but the prelude to a more profound stress test testing whether the South Korean economy's 'K-shaped' vulnerability can withstand the impact of a semiconductor cycle reversal, if the historically high leverage ratio can settle smoothly during a liquidity tightness, and whether an index driven by just two stocks can continue to bear the crown of the "world's most bullish stock market". With the Kospi 200 Volatility Index already surpassing levels during the pandemic market crash, the market is speaking in its most honest language: the South Korean Composite Stock Price Index the capital market tower carrying the dreams of 51 million citizens is becoming less like a "composite" securities market, and more like a huge, highly leveraged, fate-dictated "storage semiconductor betting table".