Goldman Sachs has sharply lowered its target for the Korean stock market while simultaneously warning that the market's bearish pricing of the semiconductor sector has diverged severely from fundamental reality.
According to Bloomberg on October 25, Goldman Sachs strategists on Friday (October 23) cut their 12-month target for the KOSPI index from 12,000 points to 9,000 points, a reduction of 25%. This adjustment came after the KOSPI had already fallen more than 35% from its June peak. Despite this, Goldman Sachs maintained a positive stance on the Korean market, noting that the revised target still implies more than 60% upside from current levels, and explicitly stating that "the market is pricing an overly pessimistic fundamental outlook."
The tech selloff triggered by the unwinding of the AI trade has dragged South Korea from being one of the hottest major markets globally this year into the depths of the lowest valuations. According to Bloomberg-compiled data, the KOSPI's 12-month forward price-to-earnings ratio has fallen to approximately 4 times, an extreme low never before seen among 18 trillion-dollar markets since 2006, and roughly half the valuation of Indonesia's Jakarta Composite Index at 8 times earnings. At the same time, some investors believe this selloff has created a rare buying opportunity.
AI trade unwind batters Korean stocks, forcing Goldman to slash target sharply
The report stated that the reason for the Goldman Sachs strategist team's downgrade of the KOSPI target was the need to adopt "more conservative valuation assumptions" after the benchmark index plunged more than 35% from its June high.
It is worth noting that Goldman Sachs had raised this target multiple times this year, with the most recent increase occurring in June, and had maintained the 12,000-point target unchanged throughout the subsequent global AI stock selloff. This downgrade marks a major shift in Goldman Sachs' assessment of the Korean market.
Chip giants such as Samsung Electronics and SK Hynix have made the KOSPI a barometer for the AI trade. Investor doubts about the sustainability of massive AI infrastructure spending have continued to intensify, compounded by rising financing costs and insufficient return signals, with selling pressure spreading from the tech sector to the entire Korean market.
Memory chip valuation implies "65% earnings collapse," Goldman says pricing is too extreme
Despite the sharp target cut, Goldman Sachs strategists explicitly pointed out that current market pricing of the semiconductor sector has deviated severely from a reasonable range.
Goldman Sachs estimates that the current valuation level of the semiconductor sector implies an expectation that industry earnings will decline 65% in 2027 — a scenario Goldman Sachs considers "too pessimistic." The report noted that the market is pricing an "overly negative fundamental outlook," and that the revised target was merely to incorporate more conservative market pricing assumptions, not a reflection of any substantive bearishness by Goldman Sachs on fundamentals.
Outside the memory chip sector, other stocks accounting for roughly half of the index's weight are currently trading at 7.6 times forward earnings, also at historically low valuations. Goldman Sachs stated that at current levels, the Korean market still offers "attractive risk-reward."
Goldman Sachs continues to favor stocks related to power, industrials, corporate governance improvements, as well as companies benefiting from domestic reflation and Korean cultural exports.
Valuation falls to "world's lowest," Korean stocks now half the price of Indonesia
According to Bloomberg-compiled data, the KOSPI's 12-month forward price-to-earnings ratio has dropped to approximately 4 times, an extreme low never seen since 2006 among all 18 major markets with market capitalizations exceeding $1 trillion at the start of the year.
By comparison, Indonesia's Jakarta Composite Index — which similarly faces the possibility of a two-notch MSCI rating downgrade and questions about market investability — still maintains a forward P/E of around 8 times. Korean stock market valuations have fallen to less than half of Indonesia's.
This valuation collapse has occurred against a backdrop of Korean macroeconomic fundamentals that are not pessimistic. South Korea's exports are expected to surpass $1 trillion this year, with robust chip demand; the Bank of Korea has also stated that economic growth this year and next should be "significantly higher" than previously forecast. However, market concerns about the memory chip cycle, AI capital expenditure prospects, and rising borrowing costs have kept investor sentiment persistently subdued.
Hui Ling Loh, Managing Director at ACG Management, said:
"Concerns about aggressive AI investment to date have widened further, enough to offset solid earnings and guidance. Investors are also weighing the impact of rising borrowing costs on AI-related stocks and the effect on demand for safe-haven assets."
Some investors see selloff as buying opportunity, but disagreements remain
Despite the gloomy sentiment, some investors have begun to view this selloff as a window for bottom-fishing.
The KOSPI has fallen about 40% from its June high, yet 12-month forward earnings forecasts have risen 22% over the same period, with the divergence between stock prices and earnings expectations further highlighting the extreme cheapness of valuations. The index is still up 31% year-to-date.
Mark Matthews, Head of Asia Research at Julius Baer, said AI demand "still substantially exceeds supply," and "so when we see a big correction like the recent one, especially overnight plunges in semiconductor stocks, it's a very good buying opportunity."
However, views differ on when sentiment will truly bottom and whether valuations can serve as a reliable reversal signal. This selloff has also sparked a deeper discussion: in an era of deep uncertainty brought by technological transformation, can traditional valuation metrics still provide reliable investment guidance?
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