South Korea's KOSPI slumps as AI-fueled rally turns into bear market

South Korea’s KOSPI had fallen about 25% from its late-June peak by Tuesday, turning a blistering AI-led advance into a bear market in a matter of weeks. The index had briefly surged above 8,000 after President Lee Jae Myung’s 5,000-point target once looked wildly ambitious, but the rally reversed so fast that the market’s best-performing major benchmark for 2026 was suddenly on the defensive.

The break came after the KOSPI slipped more than 20% from its record close on July 8, pushing it into bear-market territory. Even then, the benchmark still stood roughly 60% higher for the year, a reminder that the selloff followed an outsized run rather than a broader collapse. The move was driven overwhelmingly by Samsung Electronics and SK Hynix, whose explosive earnings tied to artificial intelligence helped propel the index higher and then left it vulnerable when sentiment turned.

The concentration of gains was matched by a surge in borrowing. Margin loans linked to Samsung Electronics rose from 1.65 trillion won to 4.76 trillion won over six months, while those tied to SK Hynix jumped from 884.1 billion won to 4.33 trillion won. Together, the two stocks accounted for about 6.56 trillion won of the increase in margin borrowing this year, a sign of how crowded the trade had become and how quickly forced selling could spread once prices started to fall.

Francis Tan of Indosuez Wealth Management called the selloff “a wake-up call,” and the phrase fit the mood in Seoul as investors confronted how narrow the rally had been. A 24-year-old college student said he borrowed money to turn 10 million to 20 million won into 300 million won during the boom, only to watch much of it vanish as prices reversed. His experience captured the retail chase into chips that helped inflate the surge and amplified the pain when it unwound.

The political backdrop has made the retreat more pointed. The Korea Times flagged tax-hike fears as a risk to Lee’s KOSPI 5,000 pledge well before the current slide, underscoring that the market’s ascent rested on policy optimism as well as AI enthusiasm. Now the slump has become a test of how far South Korea’s chip-led rally can run when global risk appetite thins and leverage starts to work in reverse.