[Good Morning Stock Market] Coexistence of Delta Variant Concerns and Corporate Earnings Expectations

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[Asia Economy Reporter Lee Seon-ae] The trend of economic recovery remains unbroken, but the spread of the Delta variant virus is causing concern. Although the stock market continues its record-high rally, it is difficult to shake off the unease. Both the economy and monetary policy are at a turning point without a clear direction.

◆ New York Stock Market Closes Higher = The New York stock market closed higher across the board. On the 1st (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 131.02 points (0.38%) from the previous session to close at 34,633.53. The Standard & Poor's (S&P) 500 index increased by 22.44 points (0.52%) to 4,319.94, setting a new all-time high. The Nasdaq index, centered on technology stocks, rose 19.42 points (0.13%) to close at 14,522.38.

The economic indicators released that day drove the stock price gains. The U.S. Department of Labor reported that the number of unemployment insurance claims in the U.S. for the week of June 20-26 was 364,000, down 51,000 from the previous week. This is the lowest level since mid-March last year when the COVID-19 pandemic began in earnest. It is also the second-largest decrease since the end of April, two months ago, when claims dropped by 83,000.

Recently, the Federal Reserve (Fed) has been focusing on employment recovery as a prerequisite for tightening, so the market is paying close attention to employment data. The continuous decline in unemployment claims is interpreted as a signal that layoffs have decreased and employment is recovering.

The U.S. 10-year Treasury yield showed little movement from 1.46% despite the improvement in weekly unemployment data. With Treasury yields stabilizing at low levels, technology and growth stocks have recently shown strength. Therefore, investors are watching for the possibility of a sharp rebound in Treasury yields depending on the data. The manufacturing index released that day was also generally positive. The Institute for Supply Management (ISM) announced that the manufacturing Purchasing Managers' Index (PMI) for June was 60.6.

Meanwhile, the global spread of the COVID-19 Delta variant is weighing on the stock market. Hans Kluge, WHO Regional Director for Europe, said that the decline in new COVID-19 cases in Europe over the past 10 weeks has ended, and infections are rising again. He warned that new outbreaks could occur in Europe if people do not adhere to discipline and act with control, noting that new COVID-19 infections increased by 10% last week.

◆ Park Sang-hyun, Researcher at Hi Investment & Securities = Considering the export trend in the first half of the year, the annual export volume this year is highly likely to surpass the record high of $604.9 billion in 2018. The full-scale reopening of economies centered on developed countries, the revenge consumption cycle, the innovation technology investment cycle, and the infrastructure investment cycle will drive a strong upward trend in the domestic and global trade cycles in the second half of the year.

KOTRA estimates this year's annual export volume at $600 billion to $610 billion, while the Korea Institute for Industrial Economics & Trade and the Korea International Trade Association forecast $610 billion and $601.7 billion, respectively. The increased likelihood of the annual export volume reaching an all-time high suggests that corporate operating profits (based on the exchange) could also reach record highs. The highest annual operating profit to date was around 197 trillion KRW in 2018, but this year it is expected to reach about 220 trillion KRW.

Along with strong exports, considering the profit increase effect for domestic companies in the second half due to the government's supplementary budget implementation, it cannot be ruled out that domestic companies' operating profits this year will exceed expectations. Of course, potential risks to the domestic export economic cycle in the second half include the resurgence of COVID-19, a slowdown in China's economic momentum, and supply chain disruptions, but the possibility of these risks damaging the strong export economic cycle remains low.

◆ Han Dae-hoon, Researcher at SK Securities = There is still abundant liquidity and heightened expectations for earnings. Although concerns about inflation were high, since the Fed has stated that there will be no preemptive rate hikes, attention is now shifting to earnings. Samsung Electronics is scheduled to announce its preliminary earnings next week, marking the start of the Q2 earnings season. The current estimate for Samsung Electronics' Q2 operating profit is close to 11 trillion KRW. Earnings estimates for Q3 and Q4 are also being revised upward, attributed to improved profitability in memory semiconductor production and the display sector.

If Samsung Electronics' earnings improvement, which has been sideways amid the KOSPI's bullish market, materializes, it could signal the possibility of further stock market gains, making this earnings announcement important. Overall expectations for Q2 earnings are higher than ever. With all Q2 exports recording increases of over +30% compared to the previous year, expectations for Q2 earnings have risen.

Reflecting strong exports and expectations for the resumption of economic activities, the KOSPI's estimated net profit for Q2 has been revised upward by +28.9% from 27.5 trillion KRW at the beginning of the year to 35.4 trillion KRW currently. Since Samsung Electronics' earnings estimate accounts for about 24% of the total estimate, this Q2 earnings season is expected to provide some indication. Compared to the materials consumption sector, which rose on expectations of normalization delayed by the extension of social distancing, the semiconductor and automobile sectors that showed strong exports, as well as the IT and IT software sectors, are judged to be more attractive.

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