Goldman Sachs Raises KOSPI Target to 12,000 Points, Maintains Overweight on Korea

Overview

This is a weekly strategy report by Goldman Sachs on the Korean stock market. Despite a 4% pullback in KOSPI this week due to won depreciation (down 2.3% against the USD) and weakness in Wall Street tech stocks, Goldman Sachs maintains its Overweight rating on Korea and raises its 12-month KOSPI target to 12,000 points, implying a 37% price return. The report argues that despite the index doubling this year, rising concentration risks, and increased retail speculation, the strategic investment case for Korea remains compelling. Core support comes from earnings growth and still-conservative 8x forward P/E valuations.

Core views

Goldman Sachs' core bullish thesis on the Korean stock market rests on dual drivers: earnings growth and valuation repair. First, on the earnings front, KOSPI's 12-month forward EPS was revised up 2.6% this week, with the construction sector seeing the largest upward revisions and the securities sector the most downward. More critically, Goldman Sachs' earnings revision leading indicator (ERLI) suggests room for further upside in consensus earnings, although the pace of revisions may have slowed compared to recent months. Developments related to technology and AI infrastructure continue to provide strong evidence for earnings upside, aligning with views from the US strategy team and technology analysts. Regional strategy teams have raised earnings forecasts, primarily driven by Korea and Taiwan. Secondly, on the valuation front, current market valuations remain attractive. Goldman Sachs sets the KOSPI target at 12,000 points based on an 8x forward P/E, considering this a conservative assumption. The report specifically notes that despite the strong price rally this year, the market continues to undervalue the duration of the high-profit cycle for memory stocks. Continued supply shortages relative to rapidly growing computing demand imply that profitability for memory stocks could be more durable than expected. Furthermore, earnings growth outside Samsung Electronics and SK Hynix has exceeded 50%, indicating opportunities beyond memory stocks. However, the report acknowledges market vulnerabilities: KOSPI has doubled this year, Samsung Electronics and SK Hynix account for over half of the market cap, retail speculation has increased, and the market is susceptible to pullbacks. Therefore, it suggests considering downside protection strategies going forward, but the strategic case remains compelling.

Analysis framework

Goldman Sachs' analysis follows a dual-track framework of 'earnings-driven + valuation-anchored'. On the earnings side, the team developed ERLI (Earnings Revisions Leading Indicator) as a leading indicator, tracking the momentum and direction of analyst earnings revisions to predict future trends in consensus earnings. This indicator currently points to better earnings revision prospects for technology and hardware sectors in Korea and Taiwan. On the valuation side, the team employs historical P/E range analysis, comparing current valuations against discount levels relative to global and Asia-Pacific peers, concluding that the Korean market remains at historical lows. The report also combines macroeconomic data (such as manufacturing PMI and export figures) with micro-level corporate earnings: South Korea's May manufacturing PMI rose to 54.8, the strongest expansion since March 2021; May exports grew again beyond expectations driven by strong chip shipments, despite weakness in other export categories. This 'macro-micro' cross-validation method enhances the credibility of the earnings upgrade judgment.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Forward P/E Valuation Anchor

  Goldman Sachs uses 12-month forward P/E as the core valuation anchor, currently setting a target P/E of 8x, which is below the historical mean, reflecting conservative assumptions regarding earnings sustainability. This method decomposes the index level target into two independently analyzable variables: 'earnings × valuation'.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Memory Supply-Demand Gap Analysis

  The core logic for analyzing memory stocks in the report is the supply-demand framework of 'supply shortage vs. rapidly growing computing demand'. When demand growth consistently exceeds supply growth, prices remain high and profit cycles extend; this is the key analytical paradigm for judging the sustainability of high profitability in memory stocks.

• Quantitative/Factor/Portfolio TheoryMulti-factor model

  ERLI Earnings Revision Leading Indicator

  ERLI (Earnings Revisions Leading Indicator) is a quantitative tool developed by Goldman Sachs that systematically tracks the direction and intensity of analyst earnings forecast revisions to anticipate changes in consensus earnings trends. In this report, the indicator shows that while earnings upgrade momentum in Korea continues, the pace may slow.

• Cycle and Business Cycle FrameworkBusiness Cycle Turning Point Analysis

  Validation of Manufacturing PMI and Export Data

  The report uses South Korea's manufacturing PMI (54.8, strongest since March 2021) and export data (strong chips) as validation indicators for economic business cycles, cross-verifying them with stock market earnings forecasts. This is a common method for determining cyclical positions.

Key data

• KOSPI Weekly Decline4%Dragged down by weaker won and sluggish US tech stocks
• Won Weekly Depreciation vs USD2.3%Also depreciated 1.9% vs JPY and 2.0% vs EUR
• KOSPI 12-Month Forward EPS Revision+2.6%Construction sector had strongest upgrades; securities sector had largest downgrades
• Goldman Sachs KOSPI 12-Month Target Price12,000 pointsImplies 37% price return, based on 8x forward P/E
• Current KOSPI Forward P/EApproximately 8.3xAt low end of historical range
• South Korea May Manufacturing PMI54.8Strongest expansion since March 2021
• KOSPI 2026E P/E (MSCI Basis)9.1x2027E is 6.9x
• Korean Stock Market Risk Indicator (GSSRKERB)-1.2Entered risk-averse zone
• Foreign Investor Net Outflow (Weekly)19,387 billion KRWPrimarily flowing out of tech and auto sectors
• Retail Investor Net Inflow (Weekly)15,978 billion KRWAbsorbing foreign sales

Impact & implications

The report argues that despite short-term market pullbacks due to external factors, the strategic investment logic for Korean equities remains unchanged. Core support lies in: first, structural demand driven by the AI investment boom and energy supply shocks, pushing up memory spot prices and prompting institutions like TrendForce to raise forecasts, combined with record DRAM exports; second, potential catalysts from corporate governance policies in the second half of the year (such as shareholder return reforms and valuation enhancement plans), particularly Value-Up themes related to holding companies. The report highlights that market concentration risks (Samsung Electronics and SK Hynix account for over half of market cap) and increased retail speculation are risk factors to watch, suggesting consideration of downside protection strategies going forward, but strategically one should still lean into earnings.

Risks

• Market Concentration Risk: Samsung Electronics and SK Hynix account for over half of KOSPI market cap; index performance overly dependent on a few heavyweight stocks
• Increased retail speculation activity, rising market vulnerability, susceptibility to pullback shocks
• Sustained won weakness may exacerbate pressure on foreign capital outflows
• Spillover effect of weak Wall Street tech stocks on Korean tech sectors
• Continuous net outflow by foreign investors, with 19,387 billion KRW flowing out this week

What to watch

• Subsequent changes in the ERLI earnings revision leading indicator; focus on whether upgrade momentum continues
• Price trends in memory spot markets and updates to forecasts by institutions like TrendForce
• Progress on corporate governance policies in the second half of the year, including shareholder return reforms and valuation enhancement plans
• Sustainability of South Korea's manufacturing PMI and export data
• Changes in foreign capital flows, especially fund movements in tech and auto sectors