[Good Morning Stock Market] Liquidity Drives the Market... "Earnings Determine the Direction"

Increase Interest in Stocks with High Potential for Earnings Improvement
High Profit Growth Rates in Health Care and Software Sectors

[Asia Economy Reporter Minji Lee] The sentiment in the stock market, driven by liquidity, is changing. Investment funds are concentrating mainly on stocks expected to improve earnings and potentially become leading stocks in the future. On the 23rd (local time), the Nasdaq index in the U.S. stock market hit all-time highs both intraday and at closing prices, continuing its upward trend for eight consecutive trading days. The rise in the index is believed to be driven by strong economic indicators and expectations of earnings improvements from companies listed on the Nasdaq.

[Image source=Reuters Yonhap News]

◆ Sangyoung Seo, Researcher at Kiwoom Securities = The U.S. stock market is being led by gains in some large technology stocks with high earnings expectations. The release of favorable economic indicators has also raised hopes for economic recovery. The Eurozone manufacturing PMI for June increased from 39.4 to 46.9, and the services PMI rose from 30.5 to 47.3. The U.S. manufacturing PMI also rose from 39.8 to 49.6, and the services PMI from 37.5 to 46.7, both exceeding expectations and further boosting optimism about economic recovery.

A notable feature of the U.S. stock market is that the sectors showing gains are those with heightened expectations for earnings improvement. This indicates that while global stock markets have been strong due to liquidity, corporate value will now become a key variable.

In fact, Apple rose about 2% after news emerged that it would use its own semiconductor chips in its products. Amazon (1.8%) also led the index's rise as the possibility of earnings improvement was highlighted.

Meanwhile, according to the World Trade Organization (WTO) forecast, logistics volume in the second quarter of this year is expected to decrease by about 18% compared to the previous year. This will inevitably have a negative impact on Korea, which is highly dependent on exports. The possibility that Korea's export growth rate may be weaker than expected implies that corporate profit decline could accelerate.

◆ Bongju Kang, Researcher at Meritz Securities = The recent strength of growth stocks compared to value stocks is observed not only in Korea but across global stock markets. In the U.S., which leads the new economy, the strength of growth stocks relative to value stocks is the greatest. Considering the U.S. case, it is expected that the strength of growth stocks will continue in Korea and other countries.

The concentration on growth stocks is reflected in the PER differentiation among stocks. Within the KOSPI 200, the PER gap between the top 20% and bottom 20% stocks is about 15 times, which is near the historical maximum. This is because investors are giving a significant premium to stocks expected to have structural long-term growth, such as software and healthcare. Considering the environment of prolonged low growth and low interest rates, the attractiveness of growth stocks is increasing.

Looking at profit growth rates by sector from 2018 to 2021, the reason investors focus on growth stocks becomes clearer. Sectors expected to have relatively stable and high profit growth rates over three years without base effects are consumer staples, healthcare, and software.

Selective responses to sector stocks are necessary until corporate earnings forecasts show an upward trend. In conclusion, the investment attractiveness of software, healthcare, semiconductors, consumer staples, insurance, and telecommunications sectors is increasing. Among these, software and healthcare are the most representative growth and leading sectors. As market concentration intensifies, further gains in these two sectors are expected. However, it should be kept in mind that short-term volatility risks may increase in July and August.

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