The South Korean KOSPI index, after surging over 300% from April 2025 to June 2026, has fallen 40%, erasing half of its previous bull market gains. This decline is primarily driven by investor concerns about the heavyweight memory sector, exacerbated by retail deleveraging (especially through leveraged ETFs). Against a backdrop of record corporate profits, the sharp market decline has driven the 12-month forward price-to-earnings ratio down to 4, three standard deviations below the mean, raising questions about what the market is pricing in and what a fair valuation should be.
We explore this issue from four perspectives. First, we assess the earnings prospects priced into the semiconductor memory sector in the current and historical cyclical context. Second, we evaluate non-memory sectors in the market using current and historical valuation ranges. Third, we measure the extent to which high volatility may suppress valuations. Finally, given the prospect of slower earnings growth in 2027-2028 following this year's exceptional EPS growth, we re-examine how the market is pricing in earnings momentum.
Our conclusion is that the market is pricing in an overly pessimistic fundamental outlook. We have lowered our KOSPI target from 12,000 to 9,000 to incorporate more conservative assumptions about how the market might price in fundamentals, but we still believe the market offers an attractive risk-reward ratio at current levels. Besides the memory sector, attractive themes include power, industrials, corporate governance, reflation beneficiaries, and K-pop culture.
