South Korea's stock market posted a powerful recovery on Friday, erasing much of this week's losses as renewed optimism surrounding artificial intelligence investment fuelled demand for the country's largest technology stocks.

The benchmark Kospi climbed about 14%, marking its strongest single-day performance on record. Chipmakers led the advance, with SK Hynix recording a historic rebound while Samsung Electronics also posted significant gains as investors returned to semiconductor shares.

The rally followed a strong overnight performance on Wall Street, where better-than-expected earnings from major U.S. technology companies reinforced confidence that global spending on AI infrastructure remains resilient. Positive sentiment was further supported after SK Group Chairman Chey Tae-won disclosed purchases of SK Hynix shares, strengthening investor confidence in the memory chipmaker's long-term outlook.

Market participants said foreign investors were the primary drivers of Friday's advance, while short-covering activity and portfolio adjustments by leveraged exchange-traded funds added further momentum. New margin requirements introduced for leveraged ETF investors at the end of July may also have accelerated repositioning across the market.

Despite the scale of the rebound, analysts cautioned that the surge should not be viewed as confirmation that volatility has passed. Many believe the market had become heavily oversold after recent declines, creating conditions for a sharp technical recovery rather than signalling a lasting change in trend.

The recovery follows one of the most turbulent periods for Korean equities in recent years. Earlier this week, semiconductor stocks came under heavy pressure as investors questioned elevated AI-related valuations, while leverage and forced liquidations intensified selling across the sector.

Even so, the longer-term outlook for AI remains supportive. Analysts noted that demand for high-bandwidth memory chips and AI infrastructure continues to strengthen, suggesting that the industry's underlying fundamentals remain intact despite recent market turbulence.

Others remain more cautious, arguing that elevated leverage and rapidly shifting investor sentiment could continue to produce large price swings. They warned that Friday's rally may represent a relief bounce rather than the beginning of a sustained bull market.

Investors will now be watching whether overseas funds continue allocating capital to South Korean equities after short-covering activity fades. Continued foreign inflows could provide the foundation for a broader recovery, while weaker participation may leave the market vulnerable to renewed volatility in the weeks ahead.

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