[Good Morning Stock Market] US Stock Market Growth Stocks Continue to Rally... "Focus on Sectors Where Earnings Weight Exceeds Market Cap Weight"

[Asia Economy Reporter Eunmo Koo] Growth stocks continue to show strength in the U.S. stock market. It is analyzed that attention should be paid to sectors within the S&P 500 index where the profit weight is greater than the market capitalization weight, such as tech, healthcare, consumer discretionary, and consumer staples.

◆Jaeman Lee, Researcher at Hana Financial Investment=The growth stock rally is persisting in the U.S. stock market. Compared to the end of March, the S&P 500 Growth Index has posted a 15% return, the highest among other style indices. This is the result of a skeptical consensus on future market interest rate hikes (departure from the low interest rate regime), as the U.S. Federal Reserve (Fed) is leading the purchase of domestic government bonds amid ongoing low growth.

The growth stock concept has also changed, possibly due to COVID-19. Compared to last year, stock price returns by sector are diverging based on the 2021 earnings growth rate rather than 2020. The earnings growth rate for 2020 is almost ignored in the stock market as if it never existed.

The current market capitalization weight of sectors that can be classified as beneficiaries of low interest rates?tech, healthcare, consumer discretionary, and consumer staples?accounts for a record high 72% within the S&P 500 index (profit weight 70%). Conversely, the market capitalization weight of traditional cyclicals (energy, materials, industrials) and financial sectors is at a record low of 25% (profit weight 26%).

One investment strategy idea to consider is focusing on sectors within the S&P 500 tech, healthcare, consumer discretionary, and consumer staples sectors where the profit weight exceeds the market capitalization weight. From the perspective of continued low interest rates and expanding interest in growth stocks, theoretically, the market capitalization weight could rise to match the profit weight.

First, pharmaceuticals & biotechnology (market cap weight 8.9%, 12-month forward net profit weight 12.1%) and healthcare equipment & services (7.2%, 7.7%) fall into this category. Especially due to COVID-19, the U.S. has exposed vulnerabilities in its healthcare system and infrastructure, making it highly likely that future government investments will focus on these areas. It is advisable to pay attention more to healthcare equipment & services companies (such as UnitedHealth, Abbott Laboratories, Thermo Fisher, Danaher) rather than traditional pharmaceuticals & biotechnology. The U.S. healthcare equipment ETF, IHI US Equity, can also be an investment alternative.

Meanwhile, technology hardware (7.4% market cap, 7.8% profit weight) and semiconductors & equipment (4.7%, 5.6%) are sectors where market cap weight is lower than profit weight. However, since they are at the center of recent trade frictions with China, they are relatively less attractive investments compared to software sectors. Among companies in these sectors, those with relatively low dependence on the Chinese production value chain, such as Intel (24% China share among overseas parts suppliers), Nvidia (24%), Applied Materials (0%), and Lam Research (0%), could be considered as part of a differentiated strategy.

◆Sangyoung Seo, Researcher at Kiwoom Securities=The U.S. stock market surged as expectations for successful vaccine development spread, highlighting the possibility of a faster economic reopening. Not only the stock market but most financial markets, including commodities, showed strong risk asset preference, which is expected to have a positive impact on the Korean stock market. Additionally, the easing of concerns over delayed economic recovery raises foreign investors' buying expectations, making supply-demand factors favorable. Furthermore, positive remarks from Jerome Powell, Chair of the U.S. Federal Reserve, and Yi Gang, Governor of the People’s Bank of China, about adopting more flexible and stronger monetary policies also contribute positively.

Meanwhile, not only the U.S. stock market but also the Euro Stoxx 50 index surged more than 5%, with European markets rallying sharply. Alongside the U.S. market, sectors hit hard by COVID-19 such as automotive, financials, travel, and airlines led the gains. This suggests a strong performance for related stocks in the Korean market as well. On the other hand, another characteristic in global markets is that untact (non-face-to-face) related stocks, which benefited from COVID-19, saw profit-taking as investors sought to realize gains. Considering these changes, the Korean stock market is expected to be driven by stocks that had been underperforming, but some individual stocks may rise supported by foreign investors’ improved supply-demand amid differentiated profit-taking desires.

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