With 126mm spacing from 1989, 7-speed would still be entirely period correct if you are doing this as an original restoration.
If you are upgrading and stick with using a 7-speed freehub body and 126mm spacing, note that you can still have more gears available and compatibility with newer brifters by using 8 of 9 gears (from 9-speed casette) or 9 of 10 (from a 10 speed casette) on the 7-speed body.

Since you are replacing the chainstay anyway, you could also re-build the rear end asymetrically to 130mm, spacing the drive side over by 4mm and leaving the NDS spacing alone. This could likely be done without also needing to cold-set the more noodly seatstay. You then just need to dish the rim 4mm offset to get it back to center for original wheel alignment. Benefit of asymetrical rear spacing is that the drive side and non-drive side spoke tension are more equilized (less dished) but it is more of a problem to interchange wheels from other bikes if the need arises.