[Good Morning Stock Market] "Recent strong performance of small and mid-cap stocks is due to the results of specific IT-centered sectors"

[Asia Economy Reporter Eunmo Koo] Recently, the domestic stock market has shown a growing strength in small and mid-cap stocks compared to large-cap stocks. On the surface, this appears to be a performance difference based on company size, but in reality, it can be seen as a sector-driven market centered on IT companies.

◆Jinwoo Lee, Researcher at Meritz Securities=The strong performance of small and mid-cap stocks stands out during the stock price recovery process. Looking at May alone, the KOSDAQ rose by over 6%, while the KOSPI slightly turned downward. This raises the question of how to interpret the differentiated strength of small and mid-cap stocks.

The first question is, ‘Is the strength of small and mid-cap stocks a global phenomenon?’ The answer is ‘No.’ While it is well known that the Nasdaq is performing well in the U.S., small and mid-cap stocks are not showing strength. The S&P 500, representing large-cap stocks in the U.S., is significantly outperforming the Russell 2000, which represents small and mid-cap stocks. In the U.S., large-cap stocks are stronger than small and mid-cap stocks, and within large caps, the Nasdaq, which is technology-focused, is the strongest segment.

The second question is, ‘Is this phenomenon due to the performance of specific sectors?’ The answer is ‘Yes.’ Looking at the composition of the best-performing Nasdaq and the weakest Russell 2000 indices provides a clue. The Nasdaq is composed of 38% IT sector and 24% communication sector, accounting for more than half, whereas the Russell 2000 has 15% IT and only 3% communication sector. Healthcare accounts for the largest share at 24%, but financials at 15% and industrials at 14% mean the Russell 2000 is mainly composed of healthcare and cyclical stocks. In other words, recent U.S. index performances show that the market is led by software-centered IT companies and platform companies. It is a sector-driven market, not size-driven. The situation is similar in Korea.

From this perspective, when can KOSPI large-cap stocks perform well? This is also a matter concerning Samsung Electronics. Since the beginning of the year, Samsung Electronics has underperformed the KOSPI. The key is confidence in Samsung Electronics’ strong earnings growth next year. Whether Samsung Electronics outperforms or underperforms the KOSPI has been explained by earnings growth potential. Investors’ confidence that Samsung Electronics’ earnings growth rate will exceed the market next year is not yet strong. This means the strength of small and mid-cap stocks may continue for a while. However, if the earnings outlook after Samsung Electronics’ second quarter becomes clearer and confidence in improvement strengthens, the stock market style is likely to change rapidly. The timing of foreign investors’ comeback is also expected to be similar to this period.

◆Seunghyun Kim, Researcher at Yuanta Securities=The price-to-earnings ratio (PER) of the U.S. stock market has exceeded 20 times. Despite a sharp drop in earnings, stock prices rebounded sharply, and the MSCI-based PER in May rose to 21.0 times, the highest since April 2002. At that time, the U.S. stock market was nearing the end of a long period of high valuation with PER above 20. Korea’s PER is 11.0 times, about half of the U.S., and considering earnings weakness over the past year, even if stock prices rise, the forward PER may not change much or could decline. The upcoming events?the Chinese Two Sessions on the 21st and the Monetary Policy Committee’s interest rate decision on the 28th?will also act as downside support factors for the stock market. It remains a favorable time to invest in KOSDAQ over KOSPI and small and mid-cap stocks over large caps. If you want to hedge short-term risks with inverse investments, the U.S. stock market inverse seems more advantageous.

This content was produced with the assistance of AI translation services.