Amid geopolitical tensions in the Middle East, South Korea's KOSPI index recently experienced a sharp sell-off, declining by as much as 20%. However, Goldman Sachs has issued a reassuring message: do not be misled by short-term volatility—Korean equities are poised to reach new highs following a period of consolidation.
According to a recent research report, Goldman Sachs emphasizes that panic-driven selling actually presents a buying opportunity rather than a signal to exit the market. The report clarifies that, considering the impressive 176% surge in Korean stocks since April 2025, the current downturn should be viewed as a "delayed correction" rather than the beginning of a bear market. Far from signaling a prolonged decline, Korean stocks are expected to rebound and achieve new record levels after this phase of consolidation.
Crucially, based on the strong performance of semiconductor memory chip prices, Goldman Sachs has further raised its 2026 earnings growth forecast for the Korean market to 130%. The firm has also significantly increased its year-end target for the KOSPI index to 7,000 points, implying a potential upside of approximately 25%.
To understand the nature of the recent decline, it is essential to consider its context. Recent Middle East conflicts triggered a sell-off across Asian markets, with South Korea being particularly affected. In the days following the escalation, the KOSPI fell 20% from its closing high on February 26, including a record single-day drop of 12.06% on March 4. This sparked concerns about a potential market crash or the onset of a bear market.
However, Goldman Sachs stresses that this decline must be evaluated against the backdrop of prior substantial gains. From its low on April 9, 2025, to its peak in late February 2026, the KOSPI surged by 176%. Even from the interim low on November 21, 2025, the index still gained 65%. In this context, the 20% pullback since February 26 represents only half of the recent rally and less than one-third of the full uptrend.
Notably, after the historic 12.06% plunge on March 4, the index rebounded by 10% the following day, reclaiming its 30-day moving average and indicating that the long-term upward trend remains intact. This pattern suggests that the decline is better characterized as an oversold correction rather than the start of a bear market.
Historical data supports this view. An analysis of the KOSPI's most severe single-day declines—including those during the 9/11 attacks (-12.0%), the global financial crisis (-10.6%), and the COVID-19 pandemic (-8.4%)—shows that the index delivered average returns of 15.8%, 25.4%, and 49.4% over the subsequent three, six, and twelve months, respectively, provided that fundamentals remained sound.
Additionally, during past spikes in global geopolitical risk, Korean equities have consistently rebounded significantly within one to two quarters.
Concerns over excessively crowded positions potentially triggering forced liquidations have been a major source of investor anxiety during this downturn. However, after dissecting position data layer by layer, Goldman Sachs concludes that these fears are overstated.
Foreign investors have been net sellers of $15 billion year-to-date, primarily in heavily weighted semiconductor stocks such as SK Hynix (which had gained up to 70% this year) and Samsung Electronics (+85%), partly due to passive rebalancing of the iShares MSCI South Korea ETF. Despite this, foreign ownership of Korean stocks stands at 34.5%, only 0.7 standard deviations above the historical average since 2000—indicating elevated but not extreme positioning.
Retail investors were net sellers throughout 2025 and early 2026, only turning net buyers in February. While margin debt has reached a record high in absolute terms (33 trillion won), it represents just 0.6% of total market capitalization—a five-year low—suggesting limited leverage risk.
Domestic institutional investors have been consistent net buyers since last year, with inflows reaching 19.9 trillion won year-to-date. Their allocation to equities remains below historical averages, implying room for increased exposure rather than pressure to reduce holdings.
Overall, Goldman Sachs believes current positioning does not pose a systemic forced liquidation risk, and market panic has exceeded what fundamentals justify.
Strong fundamentals underpin Goldman Sachs' bullish outlook. The firm has raised its 2026 earnings growth forecast for the Korean market to 130%, marking the third upward revision this year. The key driver is the continued strength in the semiconductor memory sector.
Sustained capital expenditure by hyperscale cloud providers is fueling robust demand for DRAM and NAND, while supply constraints persist, leading to rising average selling prices for memory chips—TrendForce has again revised its ASP forecasts upward. South Korea's memory chip exports hit a record high in February.
Goldman Sachs' Earnings Revision Leading Indicator, which uses high-frequency macro and industry data to predict changes in analyst earnings estimates over the next two months, is most optimistic for South Korea and the technology sector across all Asia-Pacific markets and industries. Moreover, better-than-expected fourth-quarter 2025 earnings suggest that 2026 growth is built on a solid foundation.
Following a net decline of about 12%, Korean market valuations have become even more attractive. The KOSPI now trades at a 12-month forward P/E ratio of just 8.8 times (0.8 standard deviations below the historical average), with a P/B ratio of 1.8 times and an ROE exceeding 20%. Even excluding Samsung and SK Hynix, the market's forward P/E is only 12.9 times, still undervalued compared to regional peers.
Based on higher earnings expectations, Goldman Sachs has raised its year-end target for the KOSPI from 6,400 to 7,000 points, implying a target P/E of 9.8 times. This suggests a potential price return of 25%. When including potential currency appreciation and dividend income, the total return in U.S. dollar terms could reach 28%. The firm maintains its "overweight" rating on South Korea in its regional allocation.
The upward revision of the Korean target also led Goldman Sachs to raise its year-end target for the MSCI Asia Pacific ex-Japan index from 890 to 900 points.
Additionally, the firm has upgraded its rating on the regional energy sector from "underweight" to "neutral," citing recent oil price increases driven by Middle East tensions and potential support from strategic reserve replenishment demand.
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