[Practical Finance] What Is the Outlook for the Global Stock Market in the Second Half of the Year?

Strong US Stock Market Takes a Breather... Sluggish Chinese Stock Market Heads to 4000

[Asia Economy Reporter Song Hwajeong] Following last year, the enthusiasm of ‘Seohak Gaemi’ (domestic individual investors investing in overseas stocks) for overseas stock investment continues this year, and attention is focused on the movements of the global stock market in the second half of the year. While the U.S. stock market, which showed strength in the first half, is expected to weaken somewhat in its upward momentum, the Chinese stock market, which was somewhat sluggish in the first half, is forecasted to surpass the 4000 mark in the second half.

U.S. Stock Market: Third Quarter Rally Slows... Lower Expectations for Returns Needed

This year, the U.S. stock market has shown strength, hitting all-time highs. On the 12th (local time), the Dow Jones Industrial Average closed at 34,996.18, up 0.36% from the previous day; the S&P 500 rose 0.35% to 4,384.63; and the Nasdaq closed at 14,733.24, up 0.21%. Despite concerns over the spread of the COVID-19 Delta variant, the three major U.S. indices closed last week at record highs and have again reached new all-time highs.

Expectations for second-quarter earnings are driving stock price increases. Lee Younghan, a researcher at Daishin Securities, said, "Starting with financial stocks and Delta Air Lines, U.S. companies are entering the earnings season this week," adding, "The second-quarter earnings per share (EPS) of S&P 500 companies are estimated to increase by 65.8% year-over-year, and expectations for the earnings season are rising due to economic recovery, optimistic corporate earnings forecasts, and upward revisions of profit estimates." The sectors expected to lead earnings recovery include industrials, consumer discretionary, and energy. In industrials, the airline industry is expected to reduce losses, and conglomerates, aerospace and defense, and machinery sectors are estimated to see EPS growth of over 50%. Within consumer discretionary, automotive, textiles/apparel/luxury sectors are expected to improve profits, while hotels/restaurants/leisure sectors are expected to reduce losses. The energy sector is expected to turn profitable due to rising oil prices.

The U.S. stock market’s rally is expected to continue through July but slow down starting in August. July, the first month of the second half, is historically the month with the highest annual returns, so it is likely that the upward trend will continue in July this year as well. According to Daishin Securities, the average monthly returns of the U.S. stock market (S&P 500) during the five years before the COVID-19 outbreak (2015?2019) were 2.5%, -0.1%, and 0.3% for July, August, and September, respectively. Since August and September showed weak trends, it is highly likely that the stock market’s upward momentum will weaken in the third quarter this year. Moon Namjoong, a researcher at Daishin Securities, explained, "The first half was supported by abundant market liquidity and asset effects from stocks and real estate last year, which underpinned real sector growth and drove the stock market up," adding, "The second half will not deviate much from this big picture, but the pace of the rally is likely to slow."

Valuation pressures have also increased due to the sustained rise. The U.S. stock market’s market capitalization to GDP ratio stood at 202.1% as of the 22nd of last month, entering an overheated zone. Researcher Moon said, "If this indicator is 70?80%, it is undervalued; if over 100%, the market is considered bubbly," and analyzed, "The current level far exceeds 106.8% in October 2007 before the financial crisis and 151.2% in October 2019 before the COVID-19 crisis, indicating that the current U.S. stock market is significantly overvalued." He added, "While it is difficult to discuss overvaluation of the U.S. stock market based on this indicator alone, there is consensus that expectations for stock market returns this year should be lowered."

Chinese Stock Market to Reach 4000 in Third Quarter

The Shanghai Composite Index has risen only 2.15% so far this year. Compared to the domestic and U.S. stock markets, which hit all-time highs and showed strength in the first half, it has underperformed. The KOSPI rose nearly 13% this year, and the S&P 500 increased more than 16%. The Chinese stock market, which was sluggish in the first half, is expected to gain momentum in the second half.

According to the International Monetary Fund (IMF), China’s economic growth forecast for this year is 8.4%, surpassing the overall growth rate of emerging markets (6.7%). From a policy perspective, this year marks the first year of the 14th Five-Year Plan, with demand-side reforms being introduced, similar to the supply-side reforms that began in 2013 when structural adjustments were made to address overcapacity and outdated industries. Despite low economic growth rates in 2014?2015, one year after the reforms, the Shanghai Composite Index rose 145% from its low point. Researcher Moon said, "The criteria for judging emerging markets this year are economic growth and government policies supporting it, and China best fits these two criteria," adding, "The Shanghai Composite Index reflects the recovery of China’s economic value and is expected to reach the 4000 level in the third quarter."

The People’s Bank of China recently decided to cut the reserve requirement ratio by 0.5 percentage points, which is expected to improve China’s liquidity environment in the second half compared to the second quarter. Park Ingeum, a researcher at NH Investment & Securities, said, "This reserve requirement ratio cut dispels concerns about tightening by the Chinese government after the 100th anniversary of the Communist Party," adding, "This cut makes it clearer that China’s liquidity environment in the second half will improve compared to the second quarter." Park added, "Supported by solid fundamentals and improved liquidity conditions, the Chinese stock market is expected to show a gradual rebound."

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