Cyclical Stocks Rise Again... Key Points in the Global Stock Market

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Junho] There is a forecast that the rally of large-cap tech stocks, which have been driving earnings, will pause for the time being. As vaccination rates increase, it is expected that by the end of this year, attention will shift to cyclical stocks due to the resumption of economic activities.

On the 11th, Kim Hwan, a researcher at NH Investment & Securities, made this forecast in a report titled "Global Stock Market Entering the Latter Half of an N-Shaped Trajectory."

First, the impact of interest rate normalization must be considered. Despite the current high inflation rate, long-term U.S. interest rates have maintained a stable trend. As a result, stock prices centered on large-cap tech stocks have continued to rise. The reasons why interest rates have not risen include concerns over prolonged supply-side bottlenecks and sluggish service sector performance due to the spread of the Delta variant.

However, these risk factors are likely to be resolved as the year-end approaches. The ASEAN region, a global manufacturing hub, is seeing a slowdown in COVID-19 spread due to vaccine donations from developed countries, and the spread of the Delta variant in the U.S. has passed its peak. Considering this, a recovery in the service sector?centered economy is expected to resume in the U.S. Additionally, long-term interest rates are likely to reflect this and show a gradual rebound.

In particular, the possibility that concerns about a peak-out in the global and U.S. economies will materialize appears limited. The U.S. stock index moves in line with earnings levels, and since earnings forecasts are being revised upward, a stable trend in the U.S. stock market is anticipated. However, it is necessary to keep in mind that the momentum of stock price increases may slow down, as earnings momentum is weakening.

Accordingly, the rally of large-cap tech stocks, which are earnings-driven, is also likely to pause for the time being. Obstacles include the reduction of untact (contactless) benefits due to the resumption of economic activities by the end of this year and the base effect of strong earnings in the second half of last year. Valuation burdens due to rising interest rates must also be considered.

Researcher Kim analyzed, "The earnings improvement trend of cyclical value stocks is expected to become more prominent. In particular, sectors related to infrastructure, which are expected to benefit from policies, and the banking sector, which is expected to see earnings improvement due to rising interest rates, are viewed positively."

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