Why Has Korea's AI Stock Rally Stalled? KB Securities Analysis: Reasons Behind Samsung and SK Hynix's Post-Earnings Decline

A recent research report by KB Securities reveals that despite robust financial performance from South Korean listed companies, the KOSPI index has experienced sharp sell-offs. The cause is not poor corporate earnings, but rather a shift in how investors assess the value of AI investments—from "long-term growth potential" to "cost of financing."

Samsung Electronics' second-quarter earnings were nothing short of stunning. Operating profit reached approximately 89.4 trillion won, a year-on-year increase of 1,810%, while revenue hit around 171 trillion won, up 129% year-on-year—both exceeding market expectations. Yet, following the earnings release, the stock price plunged by nearly 10%.

SK Hynix faced a similar situation. Korea Investment & Securities (KIS) had forecast the company’s second-quarter operating profit to rise 556% year-on-year to 60.4 trillion won—an impressive growth rate. However, this figure was still about 8% below the market consensus of 65 trillion won, leading to a single-day stock price drop of 15%.

This "sell-the-news" market reaction precisely confirms KB Securities' core argument: investors' sensitivity to corporate earnings has significantly diminished. What now drives stock prices is the change in macro-level financing conditions.

The report highlights that the market's logic for pricing AI-related investments is being rewritten. Previously, investors were willing to pay high premiums for tech stocks with compelling long-term growth stories. Now, in a rising interest rate environment, the discounted value of these high-valuation assets is directly compressed. Capital markets now demand that AI capital expenditures generate returns that keep pace with rising funding costs. The valuation premium built on the assumption of "infinite AI growth" is undergoing systemic contraction.

KB Securities also notes that skepticism toward AI capital returns is not unprecedented. In November 2025, a similar sell-off occurred, and what ultimately reversed the downturn was not renewed confidence in AI profitability, but rising expectations of a Fed rate cut.

This indicates that "liquidity conditions" are now the central variable in market pricing.

Beyond interest rates, geopolitical risks have further fueled the sell-off, KB Securities adds.

In July 2026, U.S.-Iran tensions escalated again. The U.S. launched a new large-scale military operation against Iran, citing attacks on commercial vessels. Iran responded by announcing the indefinite closure of the Strait of Hormuz, causing international oil prices to surge.

This conflict impacted Korean equities through several channels:

- Soaring oil prices heightened global inflation expectations, increasing pressure on central banks to maintain tight monetary policies. - U.S. Treasury yields rose in tandem, pushing up global asset financing costs and risk premiums. - Foreign investor risk aversion increased, accelerating capital outflows from emerging markets.

Multiple Pressures Behind the Korean Market Pullback

KB Securities identifies rising financing costs and heightened geopolitical risks as the primary drivers of the recent weakness in Korean stocks. However, the market decline is not due to a single factor, but rather the simultaneous convergence of multiple pressures.

1. Rising Funding Costs: Tightening Monetary Policy Intensifies Market Pressure

On July 16, 2026, the Bank of Korea raised its policy rate by 25 basis points to 2.75%, marking its first rate hike since January 2023.

Although the market had partially priced in rate hikes, the tightening of monetary policy still exerted significant pressure on high-valuation stocks, especially amid recent tech stock volatility and weak investor sentiment.

Citigroup economists expect the Bank of Korea to maintain a pace of 25 basis point hikes per quarter in the second half of 2026, suggesting that rising funding costs may not be a short-term shock but a sustained drag on equity valuations.

2. Escalating Geopolitical Risks: Weakening Market Risk Appetite

Geopolitical uncertainty affects the Korean stock market through two main channels.

First, direct impact via energy prices. Further escalation in the Middle East could push up international oil prices, heighten inflation expectations, and reinforce the likelihood of global central banks maintaining tight policies—compressing valuation space for high-multiple assets like tech stocks.

Second, rising geopolitical risks reduce global investors’ risk tolerance, prompting foreign capital to exit emerging markets.

Data shows foreign investors have significantly reduced their holdings in the Korea Composite Stock Price Index (KOSPI) this year, with net foreign selling reaching 148 trillion won in the first half. On July 13 alone, foreign net selling hit 2.23 trillion won, exacerbating market selling pressure.

3. High Concentration and Leveraged Trading: Amplifying Market Declines

Beyond interest rates and external risks, structural features of the Korean market have amplified this correction.

As of the end of June 2026, Samsung Electronics and SK Hynix together accounted for approximately 60% of the KOSPI index—a historical high. About 70% of the index’s strong first-half gains came from these two AI and memory leaders.

With market capital highly concentrated in a few large tech stocks, any correction in these names can amplify overall market volatility through index weighting effects.

Additionally, newly introduced single-stock leveraged ETFs have become key amplifiers of the downturn. When the underlying stock price falls, ETFs must rebalance to maintain leverage ratios, potentially adding further selling pressure—creating a vicious cycle of "stock price drop → passive selling → further price drop."

As of July 13, over 1.2 million retail leveraged trading accounts in Korea had received margin calls, with approximately 320,000 to 360,000 facing forced liquidation.

However, Goldman Sachs analysts argue that the recent Korean market decline primarily reflects a rapid unwinding of leveraged funds, not a deterioration in corporate fundamentals or a sharp downward revision in earnings expectations.

KB Securities emphasizes in its report that for the market to achieve a sustained rebound, two conditions must be met simultaneously: first, a macroeconomic catalyst capable of stabilizing interest rate trends; second, a positive corporate-level event to restore confidence among capital providers. Relying solely on improved earnings may not be enough to reverse the current sell-off. The true key variable remains the direction of financing costs.

Regarding geopolitical uncertainty, the report suggests the situation could ease over time. Analysts note that persistently high oil and borrowing costs could affect voter support ahead of the U.S. midterm elections, creating political pressure on the White House to de-escalate tensions.

Implications for Investors: Market Focus Shifts to Liquidity and Risk Management

1. The Key Driver of Equities Is Shifting from Earnings to Funding Environment

The logic for valuing companies is changing. In the past, earnings exceeding expectations often directly boosted stock prices. But in a high-valuation environment, mere earnings growth is no longer a guarantee of price appreciation.

Investors must now pay closer attention to the overall funding environment—including interest rate trends, financing costs, and whether central bank monetary policy is shifting. When funding conditions tighten, even fundamentally strong companies may face valuation pressure.

2. High-Weight Stock Concentration and Leveraged Capital Can Amplify Market Volatility

Recent Korean market movements highlight the importance of structural risks.

When a few large-cap stocks dominate the index and leveraged trading positions are widespread, even limited negative factors can escalate into broad market turmoil due to forced capital withdrawals.

Therefore, investors must monitor not only fundamentals but also market capital allocation, leverage levels, and excessive concentration in specific sectors.

3. Geopolitical Risk May Become a Long-Term Valuation Factor

Markets previously treated geopolitical events as short-term shocks. But frequent occurrences—such as Middle East conflicts and U.S.-Iran tensions—have turned these into variables that investors must assess long-term.

Such uncertainties can affect energy prices, inflation expectations, and global capital flows, ultimately reshaping how investors value tech and high-growth firms.

4. Policy Developments Are Increasingly Important—AI Investment Is Not Just About Corporate Earnings

KB Securities specifically mentions OpenAI’s proposal for the U.S. government to take a 5% equity stake and establish an AI sovereign wealth fund. If such policies gain traction, they could reduce market concerns about AI investment risk, improve corporate financing conditions, and narrow credit spreads.

This shows that the future of the AI industry depends not only on corporate revenue and profit growth but also on government policy support, industrial regulation, and funding environments.

However, KB Securities warns that large-scale government support for AI investment, while potentially accelerating industry development, could also dull market risk awareness, encourage excessive risk-taking, and ultimately lead to asset bubbles in the long run.

The recent extreme volatility in Korean stocks reflects a market driven more by leveraged capital and investor sentiment than by actual corporate earnings. When such dynamics dominate, reversals can be swift and severe.

Therefore, in the current environment, investors should place greater emphasis on asset allocation, leverage control, and risk diversification—avoiding the temptation to rush in simply because prices have fallen.