Passing the Baton in Earnings Season... "Ride the Profit Momentum Sectors"

[Asia Economy Reporter Lee Seon-ae] As the full-fledged earnings season arrives, investment advice has emerged emphasizing the need to focus on sectors with strong earnings momentum.

According to SK Securities on the 10th, the IMF raised its global economic growth forecast in its April economic outlook. This reflects the effects of unprecedented large-scale stimulus measures by various countries and the expectation of normalization of economic activities due to vaccine distribution. The strengthening recovery of the global economy, not only domestically but worldwide, is expected to contribute to the improvement of the domestic economy and corporate earnings, which are highly dependent on exports. In particular, the improvement in the economic conditions of the United States and China, which have a high trade share with South Korea, is also positive for Korean companies. In other words, as expectations for the normalization of economic activities rise, economic recovery and increased demand can raise expectations for export growth → earnings improvement.

The full-scale earnings season begins next week. Expectations for earnings in domestic and international stock markets are higher than ever. The earnings of U.S. S&P 500 companies have been revised upward from an expected 15.8% increase at the end of last year to 23.9% currently. In most sectors, expectations for earnings improvement have increased compared to the end of last year.

Han Dae-hoon, a researcher at SK Securities, explained, "If the liquidity-driven market led by unprecedented stimulus measures due to COVID-19 had driven the market so far, now we are transitioning to a fundamentals-driven market centered on earnings," adding, "The strong earnings in the first quarter can be seen as a positive sign marking a fresh start for the earnings-driven market."

The situation is similar for domestic companies' earnings. Samsung Electronics kicked off the earnings season by announcing a preliminary operating profit of 9.3 trillion won for the first quarter. The estimated net profit for the KOSPI in the first quarter is 31.5 trillion won, the third largest after 2018 and 2017. Earnings estimates have been revised upward in most sectors. Looking at recently released macro data, the strong external demand and clear export growth momentum have been reconfirmed, making the domestic stock market still attractive in the earnings-driven market. The researcher emphasized, "It is necessary to maintain a positive view on sectors with favorable external policies and earnings momentum (semiconductors, chemicals (electric vehicles and batteries), steel, construction and building materials)."

Kim Sang-ho, a researcher at Shinhan Financial Investment, said, "The reason this earnings season is attracting more attention than others is that the stock market, which had been driven by liquidity since last year, is recently moving in line with corporate profits," adding, "Corporate profit improvement is ongoing, and the KOSPI's 12-month forward earnings per share (EPS) has more than 13% upside potential by year-end just from the time-weighted effect."

He assessed that the environment where corporate profit improvement is faster than the stock market's rise, i.e., an earnings-driven market, is likely to continue until the end of the year. Kim said, "As the market shifts to an earnings-driven phase, the point to watch in this earnings season is companies with earnings surprises," explaining, "Generally, companies that record earnings surprises tend to outperform the market."

The sectors with favorable changes in first-quarter operating profit consensus are IT (display, semiconductors), materials (chemicals, steel), and financials (securities, insurance). These sectors recorded a change rate of over 5% in operating profit consensus over the past three months. Among the sectors, SK Hynix, LG Display, Lotte Chemical, S-Oil, POSCO, Hyundai Construction Equipment, and Kiwoom Securities were selected as top picks.

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