Stock market’s relentless rise for a year… ‘bubble’ shadows spreading across the board

South Korea’s stock market has become embroiled in an overheating debate after an upward rally lasting nearly a year. Warnings are emerging over rising volatility and the burden of equity valuations relative to earnings.

According to the Korea Exchange on the 22nd, the KOSPI now stands at 5,781.20, up more than 150% in about 11 months from last April’s yearly low (2,293). On the 27th of last month, it also climbed as high as 6,347.41 intraday.

However, volatility has surged sharply as geopolitical risks stemming from the Middle East were priced in. On the 3rd of this month, the KOSPI plunged 7.24%, followed by a 12.06% drop on the 4th, marking the biggest one-day decline on record. It then rebounded 9.63% on the 5th, with sharp swings repeating. During this period, circuit breakers were triggered twice at three-session intervals.

Some overseas institutions are raising the possibility of a “bubble” in this trend. Bank of America (BofA), in a recent report, described the Korean stock market as a “textbook case of a bubble.” It cited abnormal price action—sharp rebounds following steep sell-offs—resembling past phases of financial crises.

Valuation indicators are also flashing warning signs. The “Buffett Indicator,” which divides total stock market capitalization by gross domestic product (GDP), has surpassed 200%. Typically, readings above 100% are viewed as overvalued and those above 120% as overheated. VKOSPI, a volatility gauge, also jumped to as high as 81.99 at one point, setting an all-time high, and has remained elevated since.

Meanwhile, some in Korea’s securities industry argue that overheating concerns are overstated. They contend that a recent sharp correction has largely deflated any short-term froth and that valuations remain low relative to corporate earnings.

Na Jeong-hwan, a researcher at NH Investment & Securities, said, “The KOSPI’s 12-month forward price-to-earnings ratio (PER) is 9.5x, below the 10-year average (10.5x),” adding that “there is still room for further gains as discount-removal policies continue.”

Expectations for an improvement in the semiconductor cycle are also seen as underpinning the index. With the “semiconductor supercycle” centered on Samsung Electronics and SK hynix still intact, it is too early to say the uptrend has been completely broken.

Interpretations are also divided over factors unsettling global financial markets. While warnings have been raised that a combination of surging international oil prices, overheated investment in artificial intelligence (AI), and turmoil in the private credit market mirrors the run-up to the 2008 financial crisis, some analysts say the level of structural risk differs from that period.

Heo Jae-hwan, a researcher at Eugene Investment & Securities, said, “Private credit market instability is a risk factor, but compared with 2008 there are significant differences in leverage and systemic risk,” adding that it is “closer to a medium- to long-term risk than a short-term shock.”

Markets see the KOSPI’s next direction as being determined by geopolitical variables, the interest-rate environment, and the semiconductor cycle. With the debate between overheating and undervaluation continuing, volatility-driven trading conditions are likely to persist for the time being.

Reporter Lee Song-ryeol, Hankyung.com yisr0203@hankyung.com