South Korea has experienced one of the most violent market corrections in its recent history over the past two days—a shock that began in the semiconductor sector, spread throughout the stock market, and now raises a global alert about the vulnerability of markets to the boom in artificial intelligence (AI).
The episode reveals how inflated expectations, extraordinary profits, and highly risky financial products can create an explosive combination capable of bringing down even the most profitable companies in the world.
In just 48 hours, a period in which two of the country's largest artificial intelligence chip manufacturers recorded exorbitant increases in operating profits in the second quarter, compared to the same period last year – Samsung Electronics , with a 1,800% increase on Thursday, July 30th; and SK Hynix , with a 577% increase the previous day – the Kospi index of the Seoul Stock Exchange plummeted 16%, accumulating a nearly 40% drop since its peak in June.
The downward movement comes after a euphoric start to the year. Fueled by global demand for memory chips and the historic valuations of Samsung and SK Hynix, the Kospi index more than doubled, attracting tens of millions of retail investors.
Many of them, incidentally, are newcomers to the market and willing to use margin loans to amplify gains, in addition to leveraged ETFs - funds that use debt to multiply stock market movements, causing stocks to rise or fall much faster than normal.
To give an idea of the financial merry-go-round created on the Seoul Stock Exchange, the number of individual stock trading accounts reached 110 million, the equivalent of two per citizen, a clear symptom of the speculative frenzy fueled by AI.
This euphoria, however, turned to panic. The fall in the South Korean stock market was so abrupt that trading halt mechanisms were triggered, and the market entered a cycle of forced liquidations. Even after the correction, Samsung and SK Hynix still accumulate gains of 70% and 112% respectively for the year—which reinforces the magnitude of the bubble that formed.
The tipping point came with the results from SK Hynix, the world's second-largest memory chip manufacturer. The company reported an operating profit equivalent to US$42 billion in the second quarter—a 557% jump compared to the previous year.
In any market, this number would be celebrated as extraordinary. In South Korea, it was considered disappointing. Expectations were even higher: analysts projected US$55 billion in profit. The disappointment triggered a wave of selling that sent the company's shares plummeting 20% intraday, closing down about 10% on Wednesday, the 29th.
Samsung released historic results on Thursday, the 30th: revenue equivalent to US$119 billion (a 130% increase) and operating profit of US$62 billion, an impressive growth of over 1,800% compared to the second quarter of the previous year.
Its shares, which had fallen 5.2% the previous day, saw a modest recovery despite the company's results, closing the day with a gain of 1.44%. SK Hynix shares plummeted again, falling 9.6% in trading.
Kitten
The contradiction is clear: fantastic profits are being punished by unrealistic expectations — but that's not the only factor.
The real trigger for the crisis was the unwinding of leveraged ETFs, approved by regulators at the end of May. Sixteen products were launched that replicated, with leverage, the performance of Samsung and SK Hynix.
These funds multiply both gains and losses and have become a craze among amateur investors. When stocks rose, ETFs soared; when they fell, the effect was devastating. Most of these products have lost more than 60% since their launch.
“The unwinding of leveraged ETFs is causing shockwaves in the market, with many investors seeing their principal capital almost wiped out,” revealed Namuh Rhee, president of the Korean Forum on Corporate Governance, quoted by the British newspaper Financial Times .
Margin debt – money investors borrow from brokers to buy more shares than they could afford with their own capital, using existing stock as collateral – fell from $27 billion to $23 billion in just a few days, reflecting forced liquidations that accelerated the decline. Brokerage forums were flooded with reports of losses of 70% to 80%, with investors asking, “When will I get out of this hell?”
The pressure led the Ministry of Finance to convene an emergency meeting and announce restrictions on access to leveraged ETFs. Regulators stated that these products were "amplifying market volatility."
The South Korean central bank warned of the growing risk of household debt, while lawmakers debated a tax exemption on transactions for investors who suffered large losses.
The turbulence spread to other Asian markets and the United States on Wednesday, the 29th, with companies like Sandisk, Arm, and AMD registering declines. Concern increased after a Reuters report earlier in the week indicated that China may begin mass production of DUV lithography machines, essential for advanced chips—a move that could alter the global balance of the sector.
Despite the robust results, analysts warn that the semiconductor sector may have grown "too fast." SK Hynix, for example, which had appreciated sevenfold in a year, has already lost more than half its value since its June peak. In other words, the combination of rising costs, the risk of oversupply, and unrealistic expectations about AI demand creates a scenario of uncertainty that extends beyond South Korea.
