As investors reassess the outlook for artificial intelligence demand, South Korea's stock market continues to decline, with the benchmark index approaching a technical bear market.

The Kospi index saw a maximum drop of 5.7%, bringing its cumulative decline from the record high set last month to approximately 20%. Shares of memory chip maker SK Hynix Inc fell by up to 5%, while Samsung Electronics Co Ltd shares dropped by as much as 6.9%.

Previously the world's best-performing major stock market this year, the South Korean market is highly reliant on its two major chip companies. When sentiment in the chip sector weakens, the broader index becomes highly vulnerable to shocks. Leveraged exchange-traded funds, which amplify market movements in both directions, have further intensified the volatility. Despite Samsung Electronics Co Ltd reporting a 19-fold surge in quarterly net profit earlier this week, chip stocks have continued their decline, highlighting that traders demand stronger earnings to justify the sector's high valuations.

Ian Samson, a portfolio manager at Fidelity International, stated, "The significant increase in market volatility is largely due to fundamental uncertainty. While AI is currently generating substantial, real demand for various semiconductors, this demand is supported by capital expenditure of approximately $1 trillion controlled by just a few large technology companies." He added that if such chip-related spending proves unsustainable, the market faces downside risks.

Over the past few weeks, investors have been continuously interpreting developments in the AI industry to gauge whether the current rally can be sustained, leading to sharp swings in the Kospi index. From its peak this year, the index's gains have narrowed from about 116% to around 73%, though it remains one of the world's best-performing benchmark indices.