South Korea's stock market just had one of its worst days ever. Why Morgan Stanley says it's not breaking down

The South Korean stock market's outsized hit on Tuesday appears to be a short-term pullback rather than the start of a prolonged downturn, according to Morgan Stanley. The Kospi index fell about 10% in the session, marking its worst day since March.

Tuesday became the benchmark's sixth worst session on record, according to FactSet. .KS11 YTD mountain The Kospi index in 2026 The index underperformed peer markets because it has a higher exposure to memory stocks, which tumbled amid a global chip rout , according to Morgan Stanley analyst Joon Seok. But Seok said fundamentals remain intact for these stocks, meaning the pain to investors will likely not be long term.

"We view this as a breather rather than a breakdown," Seok wrote in a Tuesday note to clients. Seok noted that Tuesday's pullback follows a big run higher, a sign that investors are looking to take some profits.

The Kospi has surged more than 62% in the second quarter and nearly 95% in 2026, according to FactSet. On top of that, the index has become known for a big swings in either direction, he said.

It's a feature that can be tied in part to its relatively high concentration in names like SK Hynix and Samsung Electronics. "Fatigue has built up," Seok said.

While memory and other AI products still have bottlenecks, the stocks should be able to recover from their recent downtrend, Seok said. Beyond chips, investors are also concerned about the potential for tighter monetary policy, he said.

Because of that, the analyst said not to expect a bear market and instead see it as traders taking a beat while they look for more clarity on policy and AI trends. Seok said he expects the second half of 2026 to be bumpier than the first.

Still, he's targeting 9,000 for the Kospi, which would mark a nearly 10% increase over where it finished Tuesday.