Analysts expect a gradual recovery, with AI investment and semiconductor earnings holding the key to the market's next move.

The Kospi has lost momentum after a blistering first-half rally, fueling concerns that the semiconductor cycle may be nearing its peak and casting doubt over the market's direction in the coming months.

The benchmark index has remained range-bound in recent months, and weakening conviction in chip heavyweights Samsung Electronics and SK hynix — two of the world's largest memory chipmakers — has kept it from recapturing earlier highs. The central question now is whether this retreat marks a pause before another advance — or the beginning of a prolonged stall.

For its 73rd anniversary special edition, The Korea Herald spoke with market experts at home and abroad to assess the Kospi's outlook. Most viewed the recent pullback as a correction, arguing that the index has likely bottomed and should recover gradually. They expect chips to continue dominating the market as artificial intelligence remains the central growth narrative.

A Pause, Not a Reversal

While the Kospi has struggled to mount any meaningful recovery following its steep decline in July, experts characterized the downturn as a short-term correction rather than a shift in underlying fundamentals.

"We are still overweight on Korea and emerging market Asia stocks, as real money buying concentrates almost entirely in tech and communication stocks," said Choi Ji-uk, senior APAC macro strategist at State Street Markets. "As long as this positioning remains intact, we view the recent correction as short-lived rather than indicative of a fundamental change in market direction."

Other experts echoed that assessment.

"Although the market underwent a sharp correction in July, the decline does not appear to have damaged the broader uptrend, given the strong gains posted in the first half of the year," said Lee Young-gon, research center leader at Toss Securities. "Nor does it signal the start of a fundamental shift in the long-term outlook, considering the tight supply-demand balance in AI memory and continued earnings growth."

Riding the AI boom-driven growth trajectory, Korean chipmakers posted strong earnings in the April–June period. Samsung Electronics' second-quarter operating profit surged 1,810.3 percent from a year earlier to a record 89.4 trillion won ($63 billion). SK hynix posted a 557.2 percent on-year jump to 60.54 trillion won.

Although some analysts have lowered their earnings projections for the chipmakers for next year and beyond, earnings growth is expected to remain solid.

"Contrary to some concerns, if large-scale AI investment continues and the earnings outlook for Korean chipmakers remains strong over the medium- to long-term, investor sentiment toward the semiconductor sector — which remains significantly undervalued compared with global peers — is expected to recover," said Park Yeon-ju, head of research at Mirae Asset Securities.

"Stock prices appear to have already priced in an excessive amount of concerns. For starters, Nvidia's second-quarter earnings report, due in late August, is expected to help ease concerns over the semiconductor sector," said Kim Hak-kyun, head of research at Shinyoung Securities.

Still, heightened volatility fueled by leveraged exchange-traded funds that shook the domestic market earlier this year continues to linger.

"Positioning has outweighed the fundamental bull case in the Korea market recently," said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. "The good news is that much of this technical pressure from leveraged ETFs has now eased, although the rebalancing flows will still have a meaningful impact."

Waiting for the Next Catalyst

With the rally having been driven by the strong chip boom, earnings growth in the semiconductor sector will be critical to reviving the market. Particular attention is focused on high bandwidth memory, the high-speed chips essential for AI accelerators, which commands premium pricing compared with conventional memory and has been in tight supply as global technology companies expand their AI infrastructure.

"Higher pricing of high bandwidth memory, likely starting from the second half of this year, should also provide an additional tailwind for semiconductor stocks. That said, we are closely monitoring Korea's semiconductor export trends. Any moderation in semiconductor export price growth could signal a more meaningful shift in the market outlook," said Choi at State Street Markets.

"Whether global AI investment can continue is fundamentally an important variable. We need to watch whether US Big Tech companies can continue to expand their AI capital expenditure," Lee of Toss Securities pointed out. "It is important not only that they are increasing investment now, but also whether they are building the financial capacity to sustain that investment going forward."

Even so, the Kospi's recovery is likely to be modest, and the market is unlikely to resume the rapid pace of gains seen in the first half.

"During the previous rally, expectations for increased AI investment and improving liquidity worked in tandem, driving a rapid expansion in valuations," Lee said. "Going forward, however, we expect the market to shift from pricing in expectations alone to scrutinizing actual earnings and companies' capacity to sustain AI investment."

Choi stressed that the recovery could be measured, as more Korean investors are channeling funds into overseas stocks, including the US market, amid the recent slowdown in the local rally. Korean investors' net purchases of US stocks totaled $4.64 billion in July — the largest monthly figure since January — marking a sharp turnaround from net selling in April and May, when they offloaded $468.92 million and $939.76 million, respectively.

"We believe the recovery is likely to be gradual rather than a sharp increase, as retail investors have started to move their investment from the domestic market to overseas stocks," Choi said.

Chips Retain Their Grip

Even if the rally resumes, the Kospi's heavy concentration in chipmakers — widely seen as a key vulnerability — is likely to persist. Despite the recent slide, Samsung Electronics and SK hynix still account for roughly 48 percent of the Kospi's total market capitalization, a concentration that reflects Korea's deep specialization in semiconductor manufacturing.

"Given that the growth story driving the Korean stock market was effectively centered on AI semiconductors, this trend is likely to recur," Lee from Toss Securities said, adding that foreign inflows are also concentrated in chips.

Some experts pointed to the changing nature of the semiconductor industry, arguing that it should no longer be viewed through the same cyclical lens as in the past.

"While semiconductors remain cyclical, the nature of the cycle has changed, with demand now driven increasingly by AI infrastructure rather than consumer products such as PCs," Kim from Shinyoung Securities said.

Yet the benefits of the AI boom could eventually spread beyond the chip sector, moving down the supply chain. While the previous rally was largely concentrated in chipmakers, gains from AI are expected to broaden across a wider range of industries over the longer term.

"While the current cycle is still being led by companies benefiting from AI infrastructure spending, the value creation is expected to shift toward AI model and service providers over the medium term," Park from Mirae Asset said.

Reflecting this shift, Morgan Stanley recently replaced chip giant Samsung Electronics with Samsung Electro-Mechanics as its top pick among Korean technology stocks. The Samsung affiliate is an integrated parts manufacturer providing key components for AI-related infrastructure.

"With the AI revolution still in its early stages, its eventual winners could capture a significant share of the value created, making a diversified approach to leading global companies more appropriate over the longer term," Park said.