South Korea's Kospi, the world's best-performing stock market this year, plunged 8% or 589 points to 6,886 on Monday, triggering a trading halt, as escalating conflict in the Gulf and Iran's claim that it had closed the strategically important Strait of Hormuz sent oil prices sharply higher and reignited global inflation fears.
The U.S. dollar strengthened alongside bond yields as investors increased expectations of another interest rate hike by the Federal Reserve. The move comes a day before Chair Kevin Warsh is scheduled to testify before Congress for the first time since taking office.
In Monday's session, SK Hynix slumped over 13%, while Samsung Electronics dropped more than 9%. Together, the two companies account for nearly half of the Korean stock market's weight. With Monday's decline, the Kospi has fallen more than 25% from its June peak, pushing it into technical bear market territory, a level it had also briefly reached last week.
The sell-off deepened losses in South Korea's equity market, which had already fallen nearly 8% last week as leveraged positions in semiconductor stocks came under pressure. Investors have become increasingly cautious over the sustainability of massive AI-related spending.
Also read: South Korea’s world-beating stocks are now trading cheaper than ever! Time to bulk up?
AI concerns persist
The sharp correction has renewed concerns that the rally in AI-linked semiconductor stocks may have outpaced underlying fundamentals. South Korea's chipmakers have been among the biggest beneficiaries of surging demand for advanced AI hardware, but the latest selloff underscores how quickly investor sentiment can shift when doubts emerge over the durability of that demand. The market's heavy reliance on a handful of semiconductor giants has also made it particularly vulnerable to swings in sentiment surrounding the AI trade.
Even after the recent decline, the Kospi remains the world's best-performing major stock index in 2026, with gains of 63% so far this year. The rally has been driven largely by strong advances in AI-related semiconductor stocks.
Is Korea still cheap?
Unlike many bull markets that are supported by cheap valuations, South Korea's rally has been powered by stronger-than-expected corporate earnings. Consensus earnings estimates for Kospi-listed companies have been upgraded for 17 consecutive months, marking the longest streak of upward revisions in more than nine years. The revisions have been supported by soaring memory chip prices as global technology companies accelerate investments in AI infrastructure.
Read more: Korea's pain will be India's gain? Why Nifty bears betting on Kospi crash may get disappointed
Despite outperforming most global markets, South Korean equities continue to trade at a significant discount to other semiconductor-heavy markets. The Kospi's price-to-earnings ratio is roughly one-third of Taiwan's Taiex.
Demand for AI infrastructure has risen sharply over the past year as technology companies around the world race to develop more advanced AI models and expand computing capacity. That has fuelled robust demand for high-bandwidth memory chips, attracting significant investor interest in South Korean chipmakers, which play a critical role in the global AI supply chain.
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