In 130 years of market history, bubbles have burst just 3 times — here's the signal to watch

The Kospi, which surpassed 9,300 in June, plunged 43.9 percent to around 5,200 in July before staging a partial recovery above 7,000. Still, concerns linger in the market that the AI boom that had driven the rally may be fading.

Lee Eun-taek, a researcher and director at KB Securities' research division, analyzed three "bubble collapse" episodes across 130 years of stock market history and identified rising interest rates, inflation and economic slowdown as common warning signals that appeared before each market peak. While maintaining a bullish outlook for the South Korean stock market in the second half of the year, Lee said "the cycle is moving into its later stages."

The trigger for July's correction was growing doubt over demand for AI models. Reports that Uber had exhausted its AI budget within four months and planned to limit employee AI usage set off the selloff.

Meeting with reporters at Korea Exchange on Tuesday, Lee said that until this spring, there had been a widespread belief in "token maxing" — the idea that users would keep consuming tokens on ever-better models. "That belief has started to waver," he said. "Companies are now using high-performance frontier models only for tasks that truly require them and replacing the rest with open-source models. This means AI demand is shifting from token maxing to token optimization."

Chinese companies, led by their low-cost models, gained prominence amid this shift. However, Lee said it remains to be seen how the pricing competition between players will affect the market, noting that China's DeepSeek has recently moved to raise prices while established US players such as OpenAI have been cutting them.

Lee also said AI investment by hyperscalers — operators of massive data centers — has reached a trajectory that is difficult for them to stop on their own. But he argued the picture could change if "capital providers" such as sovereign wealth funds and venture capital firms that fund these companies change course and cut off financing.

"For hyperscalers, success means a windfall, but for capital providers, failure means losing principal," he said. "Capital providers are inevitably more sensitive to cash flow."

Lee identified rising interest rates as the condition most likely to make capital providers turn away. Analyzing the three bubble collapses of 1929, 1968 and 2000, he said the causes differed in each case but a sustained upward trend in rates was a common thread running through all of them.

Pinpointing exactly which rate increase will burst a bubble is difficult, he said, but he proposed two questions that can help narrow it down: whether a rate rise is a "no way back" move — one that cannot be reversed — and whether rates are "breaking to new highs" by surpassing all-time records.

"A rate increase that bursts a bubble requires a sense of despair — a feeling that rates will only go up and won't come back down easily," Lee said. He added that the rate spike in May, which came as tensions between the United States and Iran threatened to close the Strait of Hormuz and send oil prices surging, did not meet that threshold. "A complete breakdown in relations between the two countries is unlikely, so that was not a 'no way back' moment," he said.

Whether rates break to new highs is also a critical variable. "On the surface, I see danger if the US 10-year yield breaks above 5.0 to 5.3 percent," Lee said. "Above 5 percent would be the highest level in roughly 20 years since 2007, and above 5.4 percent would be the highest since 2002 — at that point, money would flood into government bonds instead of risk assets." The US 10-year yield currently stands at around 4.7 percent.

Lee cited Warren Buffett's observation that "interest rates act on asset prices the way gravity acts on apples," explaining that low rates weaken gravity's pull on valuations while rising rates press down on asset values.

Inflation was the factor Lee stressed most. "When inflation arrives, there is no option but to reduce demand through tightening," he said. "Inflation is in effect the same concept as 'no way back.'" He noted that a sharp surge in inflation was a common backdrop to all three past bubble collapses.

On the second-half market outlook, Lee said he remains optimistic but cautioned that "the cycle is heading into its later stages" and that "more scenarios need to be considered going forward."

His remarks were widely read as a signal of caution — that while the conditions for a market breakdown have not yet been met, the moment they are, the landscape could change entirely.