Samsung and SK Hynix shares plummeted ahead of TSMC's earnings report. The market is waiting for signals regarding AI

The South Korean stock market experienced another sell-off on the last day of the trading week—tomorrow, South Korea celebrates Constitution Day. On July 16, the local Kospi index, one of the key indicators of investor interest in artificial intelligence, plummeted by nearly 8% during trading. The sell-off on the Korean stock exchange was led by memory chip manufacturers Samsung Electronics and SK Hynix. The share prices of the country’s two most valuable companies fell by 9.7% and 12.5%, respectively.

A report by The Information has made market participants more cautious: ASML, a key player in the semiconductor supply chain, is preparing to raise prices. Chips remain in the spotlight—the index of Asian chipmakers’ stocks fell more than 3% and was heading toward its lowest close in a month. The next key event for investors is TSMC’s earnings report: it will be released today and will provide an updated picture of the progress being made in expanding AI infrastructure, according to Bloomberg.

The KOSPI has risen more than 60% since the start of the year, so profit-taking after such a rally does not seem unusual in and of itself. However, investors are trying to determine whether the current decline will be limited to a normal correction or whether it signals weakening demand and overvaluation of companies in the semiconductor sector.

Suresh Tantia, Asia-Pacific strategist at UBS Global Wealth Management and the company’s investment director in Singapore, views the sell-off as a natural pause. “After such strong gains, it’s only natural to see a pause during which the market digests the levels it has reached and investors take profits. That’s exactly what’s happening in Korea right now,” he told Bloomberg. “We continue to view the Korean stock market positively and consider what is happening to be merely a pause in the middle of the cycle.”

The scale of the volatility also drew attention to factors that could have exacerbated the sell-off. The head of South Korea’s Financial Services Commission promised to soon introduce measures regarding leveraged exchange-traded funds (ETFs) linked to Samsung Electronics and SK Hynix shares.

These ETFs were launched just two months ago and double the daily price change of their underlying stocks. To maintain their stated return ratio, the funds are forced to adjust their portfolio composition on a daily basis. Many market participants believe that such rebalancing amplifies price movements during both rallies and declines, according to Bloomberg.

It is precisely leveraged trading that is causing concern for John Woods, Lombard Odier’s investment director for Asia. “I’ve long been alarmed by this kind of speculative frenzy among retail investors in South Korea,” he told Bloomberg Television. “I start to get worried when I see excessive use of leverage in any market. As a rule, it never ends well.”

Pessimism in the stock market was further fueled by the Bank of Korea’s decision to raise its benchmark interest rate by 0.25 percentage points to 2.75%, according to the Financial Times. The regulator began a cycle of monetary tightening to curb inflationary pressures following a new escalation of the conflict in the Middle East. Prior to this, the rate had remained at 2.5% since May 2025.

Despite South Korea’s record current account surplus, the won has depreciated by more than 4% against the dollar since the beginning of this year and has become one of Asia’s weakest currencies. According to the FT, analysts attribute this to exporters leaving their revenue abroad for reinvestment, while Korean institutional and retail investors are actively buying foreign stocks.

This article was AI-translated and verified by a human editor