Why remain bullish after cutting the target?

  • The KOSPI has fallen 40% from its June 2026 peak, even as corporate profits are at record highs. Its forward price-to-earnings ratio for the next 12 months has fallen to 4 times, 3 standard deviations below its historical average. Goldman Sachs believes the price decline has already reflected excessively pessimistic expectations for fundamentals.
  • Goldman Sachs has lowered its 12-month target from 12000 to 9000 points, still implying upside of more than 60% at the time of the report. Based on consensus earnings, the new target implies a forward price-to-earnings ratio of 6.5 times and a price-to-book ratio of 1.5 times. Compared with a return on equity of 23%, that still represents a valuation discount of more than 20% based on the historical relationship.
  • The reduction concerns the assumed valuation the market is willing to assign to earnings: Goldman Sachs accepts that high volatility, slowing earnings momentum and investor doubts about the durability of the memory cycle will keep stock valuations below levels commensurate with earnings power over the long term.

How poor an earnings outlook have memory stocks priced in?

  • Memory semiconductors account for about half of the KOSPI's weight. Samsung Electronics and SK hynix each trade at only around 3 times forward earnings, but cyclical stocks also often have low price-to-earnings ratios at earnings peaks. Goldman Sachs therefore uses the historical relationship between price-to-book ratios and future returns on equity to assess the expectations implied by prices.
  • The relationship has an explanatory power of 72% in monthly data over the past 20 years. Working backwards from the current rolling price-to-book ratio of 2.6 times, Goldman Sachs estimates that prices have factored in a scenario in which 2027 earnings are cut by 65% relative to current consensus; this is a reduction relative to forecasts, not a year-on-year decline of 65%.
  • Goldman Sachs believes the current technology hardware cycle could be longer and stronger than usual. If consensus earnings remain unchanged and the historical valuation relationship continues to hold, growth in book equity combined with a valuation recovery could roughly double sector prices; that upside depends on renewed recognition of earnings durability.

Why are non-memory stocks also considered cheap?

  • The rest of the market, accounting for roughly half its weight, trades at 7.6 times forward earnings for the next 12 months, 2.1 standard deviations below its long-term average. Yet consensus has continued to raise its forecast for 2026 earnings-per-share growth to 84%, and expects further growth of 16% in 2027 and 11% in 2028.
  • The non-memory sector has a return on equity of 14.2%, and lower volatility in profits and returns than the memory sector. Based on the historical relationship, its current price-to-book ratio of 1.1 times implies undervaluation of about 30%. Goldman Sachs therefore concludes that memory concerns have spread to other industries through broad-based de-risking, rather than earnings deteriorating equally across all sectors.

Why does high volatility constrain a valuation recovery?

  • Over the past five years, the KOSPI's 60-day annualized volatility has usually ranged from 10% to 30%, before surging above 80% in July. To maintain double leverage, leveraged ETFs must buy as prices rise and sell as they fall at the close, amplifying market moves.
  • The rise in volatility this cycle has coincided with an increase of about 2 percentage points in the equity risk premium. Mapped through Goldman Sachs's historical model, that is roughly equivalent to a 20% reduction in the price-to-book ratio and can explain half the index's decline from its June peak.
  • Leveraged ETF assets have fallen from a peak of 53 billion US dollars in June to 16 billion US dollars, weakening the force amplifying volatility. But third-quarter losses continue to weigh on retail sentiment, and it will take time for investors' willingness to take risk to recover.

Why are valuations still under pressure while earnings are growing?

  • Earnings forecasts for this year have continued to rise, but the pace of upgrades has slowed markedly in recent months. For the highly cyclical South Korean stock market, whether earnings improvement continues to accelerate also affects pricing: Goldman Sachs observes that weakening upgrade momentum has coincided with rising risk premiums and contracting valuations.
  • Goldman Sachs's top-down forecast sees annual earnings growth for the overall market slowing from more than 300% in 2026 to 38% in 2027 and 12% in 2028. Continued profit growth can coexist with pressure on valuations, which is also why the new target retains a discount.