Why the world’s best-performing stock market this year fell into bear

South Korea’s stock benchmark, Kospi, has gone from being the world’s hottest equity market to entering bear territory within a few weeks, highlighting how investors have soured on artificial intelligence plays and underscoring concentration risks.

The Kospi fell more than 5% on Wednesday, which brought it 20% below its June 19 record high, according to LSEG data. It closed slightly higher on Thursday in choppy trading.

“South Korea’s recent drawdown has been driven by heightened AI skepticism on the part of global investors, coupled with extreme market concentration,” said Manishi Raychaudhuri, CEO of Emmer Capital. 

The speed of the reversal brings to light a central feature of this year’s rally: South Korea’s outsized dependence on the AI trade. Chipmakers Samsung Electronics and SK Hynix accounted for more than half of the Kospi’s weighting as of June, data provided by Emmer Capital showed. That extreme reliance has both lifted and sunk the index.

“The correction has been driven more by positioning than by a deterioration in fundamentals,” said Jung In Yun, founder of Fibonacci Asset Management Global. Korean equities had become “one of the most crowded AI trades globally after a very strong rally, so it did not take much to trigger profit taking,” he added.

Rising global uncertainty and concerns that earnings upgrades could moderate have also made investors more cautious, although he described the drop in Kospi as “a healthy reset rather than a fundamental change in the outlook.” 

Peter Kim, global investment strategist at KB Financial Group, argued that the move also reflects a broader shift in how modern markets behave.

“The gamification of finance has led to such gyrations driven less by fundamentals but by news flows and fads,” he said, adding that retail fund flows, leveraged exchange-traded funds and AI-driven concentration have made swings of 5% to 10% increasingly common. The Kospi volatility index has surged over 200% since the start of the year.

Kospi has been hammered lately despite strong earnings from the companies at the center of the sell-off. Samsung on Tuesday reported blockbuster profit, while memory pricing continues to strengthen. The chip giant’s shares, however, tanked on concerns about AI spending.

“The market is questioning the pace of earnings growth rather than the sustainability of AI demand itself,” Fibonacci’s Jung said. “This distinction is important because it suggests we are seeing a valuation adjustment rather than the end of the AI cycle.” 

Underscoring strong demand, Rolf Bulk, head of semiconductors and infrastructure at Futurum Group said that memory prices rose between 50% and 80%…