South Korean stocks came under renewed pressure on Thursday, tanking as much as 4.5% (337 points), extending losses for two straight sessions and plunging 9% over the same period. The pullback comes after a stellar run for South Korean equities.The KOSPI has emerged as the world's top-performing stock index this year, largely driven by the surge in semiconductor stocks linked to the artificial intelligence boom. The benchmark is up 76% so far in 2026.But what’s causing panic now?At the heart of the rally is overheating. AI and semiconductor stocks, the undisputed market darlings of 2025 and 2026, have suddenly come under pressure as concerns grow that the rally may have run ahead of fundamentals. The pain has been especially visible in markets most exposed to the AI supply chain like Korea, whose benchmark Kospi has declined 13% from its recent record high.Shares of Samsung and SK Hynix, which together make up more than half of the index, remain at the centre of volatility surrounding AI-linked stocks. The stock prices tumbled up to 2% in today’s session.Market fluctuations have been amplified by the growing popularity of leveraged exchange-traded funds tied to the two chipmakers. These products magnify daily market moves, contributing to a surge in volatility. The KOSPI 200 volatility gauge climbed above 90 for the first time on Tuesday, setting a new record.Sensex, Nifty today: Catch all the LIVE stock market action hereAnother sentiment dampener is soaring inflation amid the West Asia crisis. U.S. consumer inflation increased at its fastest pace in three years in May as the Middle East conflict raised the price of gasoline and other energy products, giving more ammunition for the Federal Reserve to keep interest rates unchanged into 2027.The Consumer Price Index increased 4.2% in the 12 months through May, the largest gain since April 2023, the Labor Department's Bureau of Labor Statistics said on Wednesday. The CPI advanced 3.8% year-on-year in April. Prices increased 0.5% on a monthly basis after climbing 0.6% in April.The third straight month of strong increases in the CPI highlighted mounting pressure on households as evidence suggests more consumers are dipping into savings to finance their spending. Inflation outpaced wage growth for a second consecutive month, which could weigh on overall economic growth.Further, renewed tensions in the Middle East have also added to the fears. In the latest development, Iran announced the closure of the Strait of Hormuz after the U.S. military began fresh strikes on multiple targets inside Iran on Wednesday, marking the latest escalation in a conflict that had been largely on hold since early April, when both sides agreed to a fragile ceasefire.Demand for AI infrastructure has surged over the past year as technology companies worldwide race to develop advanced AI models and expand computing capacity. That trend has fuelled strong demand for high-bandwidth memory chips, prompting investors to pour money into South Korean chipmakers that occupy a key position in the global AI supply chain. But now, an AI-unwinding trade has exacerbated fears that the surge may have been overblown.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)