Familiarity with Economic Recovery and Earnings Improvement Expectations... KOSPI Momentum 'Pauses'

Anticipated Rise Priced In Early Year
US GDP Release, FOMC Meeting Also Insufficient as Upward Momentum

On the afternoon of the 21st, employees are working in the dealing room of Hana Bank in Jung-gu, Seoul. On that day, the KOSPI closed at 3,171.66, down 49.04 points (1.52%) from the previous day. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The KOSPI is expected to take a breather next week. Although expectations for economic recovery centered on the U.S. and improvements in corporate earnings remain, the market is already accustomed to these factors, resulting in a lack of new upward momentum.

On the 25th, IBK Investment & Securities predicted that the KOSPI would pause somewhat next week. Previously, on the 23rd, the KOSPI closed at 3,220.70 on the 20th, regaining the 3,200 level for the first time in three months. This was a record high based on the closing price. However, it then dropped more than 1%, giving back the weekly gains. The U.S. stock market's record-high streak also came to a halt this week.

On the surface, concerns over a resurgence of COVID-19 centered in India and delays in economic recovery were cited as adjustment factors. However, the fundamental reason is that expectations for economic recovery have already become familiar. Soeun Ahn, a researcher at IBK Investment & Securities, explained, "Fundamentally, both the Korean and U.S. stock markets seem to be held back by the fact that expectations for economic and earnings recovery have been largely priced in already. Even though first-quarter corporate earnings are generally exceeding market consensus, the driving force to push stock prices higher is gradually weakening." She added, "When comparing the KOSPI's annual net profit level with the stock index, it can be seen that not only this year's but also next year's earnings levels are partially reflected."

There is also a lack of new upward momentum. The upcoming first-quarter GDP announcements in Korea and the U.S., earnings reports from major U.S. tech companies, and the Federal Open Market Committee (FOMC) meeting are also unlikely to play that role. Researcher Ahn said, "Expectations for first-quarter economic indicators and earnings are already high, reflecting the favorable economic trend at the beginning of the year. Regarding U.S. monetary policy, expectations that a dovish stance will be maintained for some time have been established through repeated remarks by Federal Reserve officials, so unless the market is significantly surprised, the KOSPI's upward momentum recovery will be limited."

Of course, expectations for economic and earnings recovery remain valid. This is because the U.S. $1.9 trillion (approximately 2,124 trillion KRW) stimulus package is still being implemented. In particular, cash payments, which have a strong short-term stimulus effect, are almost complete. Since the beginning of this month, the effects of the stimulus have been confirmed in U.S. consumption and domestic export indicators. The COVID-19 vaccination situation in the U.S. is also positive. Although COVID-19 cases are surging in India and the possibility of a state of emergency declaration in Japan has increased, the situation in the U.S., which has significant influence, remains stable. The increase in new cases has plateaued, and vaccinations are progressing faster than the targets set by the Joe Biden administration.

The problem is that these positive factors have already become familiar. Researcher Ahn explained, "Expectations for economic recovery centered on the U.S. and improvements in corporate earnings remain, but these expectations themselves have already become familiar to the market. The power of favorable economic indicators and earnings to push stock prices higher is gradually weakening." She noted that the weakening upward trend in quarterly earnings consensus for the KOSPI this year is in line with this context. Ahn concluded, "Ultimately, new momentum is needed, and if not, it is highly likely that the KOSPI will continue to take a breather just before reaching its previous peak."

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