Investor optimism was on full display in Tuesday's trading session, as markets signaled that the worst of the Middle East tensions may be over, despite the ongoing conflict between Iran, the US, and Israel. Artificial intelligence (AI) related stocks returned to the spotlight, driving South Korea's benchmark index to a historic peak and pushing the Taiwan Fund Inc market to another record high.

The tech-heavy Korea Composite Stock Price Index (KOSPI) closed up 2.71%, reclaiming all the losses it had suffered in previous sessions due to the Middle East conflict. The rally was led by gains in shares of Samsung Electronics and SK Hynix. Similarly, buoyant sentiment in the Taiwan Fund Inc market, fueled by Taiwan Semiconductor Manufacturing Company, helped its local index also set a fresh all-time high.

The sharp advances in these two tech-centric Asian markets underscore a shift in investor focus away from the twists and turns of the Iran situation and back toward positive factors for the AI sector, such as tight chip supply. So far this year, the KOSPI has surged more than 50%, ranking it among the world's top-performing markets, with South Korea potentially following the Taiwan Fund Inc market's trajectory to overtake the UK in terms of market capitalization.

"With the market's attention shifting from geopolitical news to corporate earnings and AI demand, the tech theme is back in focus, driving gains in South Korean equities. Investors are rebuilding the confidence to chase the rally," said Anna Wu, a cross-asset strategist at Van Eck Associates Corp.

Across the broader Asian region, the MSCI Asia Pacific Information Technology Index rose 2.6%, bringing its year-to-date gain to nearly 40%. Signals that Iran might resume peace talks with the US also provided support to the market. This comes after the Philadelphia Semiconductor Index recorded gains for 14 consecutive sessions—a streak only seen once before in its history, back in 2014.

The South Korean market has staged a significant rebound since the initial phase of the Middle East conflict, when a spike in oil prices triggered a historic selloff in the energy-import-dependent market. As fundamentals continue to improve across sectors, including semiconductors, investor sentiment has stabilized, prompting Goldman Sachs to raise its KOSPI target to 8,000. In a report last Friday, strategists at JPMorgan Chase & Co., led by Mixo Das, raised their "bull case" target for the KOSPI to 8,500, maintaining a positive outlook on memory chip prices sustaining a "prolonged high-level cycle."

Compiled data shows that analysts' earnings expectations for the KOSPI over the next 12 months have surged 180% over the past year, reaching a record high. Despite the substantial gains this year, Samsung Electronics and SK Hynix are trading at just 5.6 and 4.8 times forward earnings estimates, respectively, compared to a multiple of about 22 for a benchmark index of US chip stocks.

On Tuesday, both domestic and foreign funds were net buyers of KOSPI constituent stocks, while South Korean retail investors were net sellers.