[TMGM Financial Recap] Why Has Goldman Sachs Cut Its KOSPI Target to 9,000 While Calling the Market “Overly Pessimistic”?

Weak sentiment towards South Korean equities prompted a 25% cut in Goldman Sachs’ 12-month KOSPI index target on 25 October, from 12,000 to 9,000. Led by Timothy Moe, the bank’s strategy team made its first substantial downward revision after several target increases this year.

Alongside that downgrade, however, the report made a seemingly contradictory observation: “The market is pricing in an overly pessimistic fundamental outlook.” Goldman clarified that the cut allowed for “more conservative market valuation assumptions,” rather than signalling a materially bearish assessment of fundamentals.

What Is a P/E Ratio of Four Telling Investors?

At approximately four times, the KOSPI’s 12-month forward price-to-earnings ratio has reached an exceptionally low level. Data compiled by Bloomberg place it more precisely at 4.2 times. That makes South Korea the first trillion-dollar equity market to trade below five times forward earnings in records stretching back to 2006.

Bloomberg tracks 18 markets that entered the year with market capitalisations exceeding $1 trillion. Before the KOSPI crossed that threshold, none of their benchmark indices had traded at less than five times forward earnings.

A comparison with Indonesia puts the discount into perspective. At approximately eight times forward earnings, the Jakarta Composite Index commands roughly twice the KOSPI’s valuation. Indonesian equities are already widely viewed by investors as a cheap market, but South Korean equities trade at about half that multiple.

Crucially, the four-times multiple describes the entire index, whose composition is highly concentrated. At one point, Samsung Electronics and SK Hynix jointly represented more than 50% of the KOSPI’s weighting. Extremely low valuations for these two semiconductor heavyweights explain much of the index’s unusually low P/E ratio.

Goldman estimates that prevailing valuations for South Korea’s semiconductor sector already discount a 65% collapse in industry earnings in 2027.

Rather than merely signalling slower growth, a 65% fall in earnings would approach the severity of a deep recession. In effect, investors have adopted the worst-case semiconductor outlook as their base case: demand collapses, prices plunge and profits are repeatedly halved. Goldman regards this premise as unduly pessimistic.

One less-noticed detail lends weight to that view. Companies outside the memory-chip segment represent approximately half the KOSPI’s weighting and are valued at 7.6 times forward earnings. Strip out memory heavyweights such as Samsung Electronics and SK Hynix, and the KOSPI’s forward earnings multiple stands at approximately 8.4 times, within the 11th percentile of its historical valuation range.

Around eight times earnings remains inexpensive, though it is considerably less extreme than four times. Pessimistic semiconductor valuations have pulled down the multiple for the broader index.

Why Are Share Prices Falling as Earnings Forecasts Improve?

Beyond low valuations, Goldman’s case for excessive pessimism draws on a more compelling divergence: earnings expectations are improving while share prices are declining.

JPMorgan highlighted this disconnect in its 20 October report. Although Samsung and SK Hynix shares had recorded steep losses during October’s correction, forward earnings projections for both companies continued to increase. Nor is the pattern confined to memory chips. Industrials, financials and healthcare have also seen earnings expectations improve, even as their share prices have fallen, albeit by relatively smaller amounts.

Speaking publicly on 22 October, Bank of Korea Governor Hyun Song Shin urged investors to watch chip prices rather than the share prices of chipmakers. He said chip prices showed no indication of declining and might advance further. Drawing on customs data, he projected total South Korean exports of more than $1 trillion this year and a current account surplus of $450 billion.

An assessment issued by South Korea’s finance ministry on 16 October struck a similar note. It pointed to robust growth expectations, a current account surplus and improving company earnings as evidence that equity market fundamentals remained sound. According to regulators, the magnitude of market falls and capital movements “may have reflected an overreaction” to developments such as higher global interest rates and uncertainty over AI semiconductor investment.

The combination of weaker share prices, higher earnings and stronger exports points towards fund flows, rather than fundamentals, as the driver of the sell-off. Low valuations have not attracted purchases because the market’s supporting sources of demand have vanished at the same time.

Overseas investors have been pulling out. Net foreign sales of KOSPI shares totalled KRW 18.115 trillion between 1 and 20 October. Of that amount, approximately KRW 14 trillion, or nearly 80%, came from Samsung Electronics and SK Hynix combined. Net foreign selling was close to KRW 2 trillion on 12 October alone, while aggregate foreign outflows over the past month surpassed KRW 29.7 trillion.

Corporate repurchases are also losing momentum. Since late August 2025, buybacks have provided the principal support for South Korean shares. Samsung’s programme is now complete, and SK Hynix is nearing the conclusion of its own, weakening a vital source of buying demand.

Leverage continues to weigh on the market. Holdings in leveraged ETFs are still elevated despite the sharp sell-off, with JPMorgan calling outflows from these products “surprisingly limited,” while outstanding leveraged positions create mechanical selling pressure when prices fall sharply. Until this overhang is largely unwound, a further round of selling remains possible.

For JPMorgan, the disconnect is clear: valuations and technical indicators strongly favour buying the dip, but marginal buyers are quickly withdrawing. Samsung and SK Hynix are bringing buybacks to a close, foreign investors remain sellers, and domestic institutional demand is subdued. The market is therefore losing its key sources of buying support at the very moment they are most needed.

What Does Goldman’s Target Cut Really Signal?

Viewed as a technical adjustment, the lower target responds to conditions already prevailing in the market. After losing more than 35% from its June high, the KOSPI ended last Friday at 5,550. With sentiment at an extreme, Goldman opted to bring its valuation assumptions into line with those conditions instead of retaining the optimistic premises behind its earlier 12,000 target. As the bank put it, the revision incorporates “more conservative market valuation assumptions.”

Calling the market excessively pessimistic is a separate analytical assessment. In Goldman’s view, prices imply an unjustified 65% collapse in semiconductor earnings in 2027, effectively making an extreme outcome the market’s base case.

Thus, the target downgrade recognises prevailing sentiment, whereas the pessimism assessment addresses fundamentals. At 9,000, even the reduced target points to more than 60% upside from the current 5,550 level.

A fall to 9,000 is not Goldman’s forecast for the KOSPI. Rather, 9,000 is its 12-month objective under conservative assumptions, still substantially higher than the market’s present level.

The bank also set out its preferred investment areas. Its positive stance covers power-related shares, industrials, companies associated with corporate governance reform, and businesses gaining from domestic reflation and Korean culture’s global appeal. What links these themes is that none relies solely on AI capital expenditure expanding indefinitely.

A four-times P/E ratio for the KOSPI provides a genuine price signal: investors are discounting a worst-case AI semiconductor cycle. Yet Goldman’s central argument is not simply that four times earnings looks cheap. It is that the implied 65% earnings collapse does not align with export trends, chip prices or upward revisions to earnings forecasts.

For South Korean equities, the difficulty lies in the simultaneous withdrawal of three sources of buying demand: foreign capital, corporate buybacks and leveraged funds. Their retreat is leaving a semiconductor-heavy index in a liquidity vacuum.

Goldman’s 9,000 target recognises the pressure exerted by these fund flows. Its accompanying assessment of excessive pessimism makes a different point: falling prices have gone further than fundamentals alone can justify.

Neither Goldman nor JPMorgan has specified when valuations might start to recover. JPMorgan has set out only a prerequisite: systematic buying is unlikely to build sufficient momentum before the leverage overhang is materially reduced and volatility eases.

Ultimately, a market valued at four times earnings is waiting for a marginal buyer prepared to enter.