[Good Morning Stock Market] "Individual Stocks Expected in Domestic Market Amid Inflation Concerns"

US Stock Market: Dow Up 0.04%, Nasdaq Up 0.06%

Global and Domestic Corporate Earnings Momentum Continues to Slow
Rising Commodity Prices and Interest Rates Increase Pressure on Corporate Margins

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As the U.S. stock market showed volatility depending on individual corporate earnings, the domestic stock market is also expected to exhibit a stock-specific market trend. Additionally, amid prolonged inflation, opinions have emerged that attention should be paid to next year's corporate earnings trends due to rising raw material prices and interest rate hikes.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Domestic stock market will produce a stock-specific market trend”

The U.S. stock market showed high volatility as individual corporate concentration increased. The expansion of volatility is estimated to be due to the fact that the 12-month forward P/E ratio based on the S&P 500 reached 21 times, significantly exceeding the 10-year average of 16.3 times and the 5-year average of 18.2 times, indicating a strong desire for profit-taking due to valuation pressure. Market participants flocked to some individual stocks with positive news, while profit-taking was observed in stocks that had experienced large price increases.

Moreover, the EIA announced that winter heating costs will increase by 30% compared to the previous year due to a surge in natural gas prices, raising concerns about the year-end shopping season, which also contributed to increased volatility. Additionally, some companies that reported earnings on the day claimed that supply chain issues might lead to shortages of goods during the year-end shopping season, which is also considered to have had an impact.

However, the U.S. stock market showed resilience as news of the social spending bill's passage approached. House Speaker Pelosi claimed that 90% of the social spending bill was completed, and Democrats in the Senate mentioned significant progress in finalizing the bill with President Biden, raising expectations for a final agreement.

The Korean stock market is also expected to show a stock-specific market trend with high volatility in individual stocks. The increased expectation for the passage of the U.S. social spending bill and the upcoming large-scale fiscal policy implementation are expected to have a positive impact on the Korean stock market. However, ongoing global supply chain instability and some raw material shortages due to China's power shortages remain burdens. Furthermore, the overall investment sentiment is expected to be weighed down by factors such as the Russell 2000 index falling 0.72%. The domestic stock market is expected to start slightly lower due to profit-taking and then show a stock-specific market trend.

Myeonggan Yoo, Researcher at Mirae Asset Securities: “Corporate profit momentum slowdown continues amid prolonged inflation”

Amid ongoing inflation concerns due to global supply chain disruptions, corporate earnings expectations inevitably play a crucial role in stock prices. This is because corporate earnings are evaluated with a discount equivalent to the inflation rate.

However, the earnings trends of global and domestic companies are sluggish. The earnings consensus for developed countries has slowed in upward revisions, while emerging markets have shifted downward. Specifically, despite domestic companies achieving record-high earnings in Q3, downward revisions of next year's earnings consensus continue. The market's expected combined operating profit for next year has been revised down by 4.3%, from KRW 232.2 trillion in early August to KRW 222.3 trillion currently. The slowdown in profit momentum was led by the semiconductor sector, which saw a 12.9% downward revision from KRW 83.2 trillion in early August to KRW 72.5 trillion.

Considering recent trends, the corporate earnings growth rate for next year is likely to slow down further. Attention should be paid more to changes in operating profit margins rather than sales growth rates, as concerns about margin pressure due to rising raw material prices and interest rates may increase. Domestic companies have relatively low absolute operating profit margins (6-9%), so earnings volatility is high, and corporate earnings are more sensitive to changes in operating profit margins than to sales.

By industry, sectors expected to see significant operating profit margin improvements in 2022 include hotels and leisure, software, media, IT hardware, and IT appliances. Conversely, chemicals, displays, steel, transportation, energy, and semiconductor sectors are expected to experience declines in operating profit margins. The proportion of companies expected to improve operating profit margins next year is forecasted to drop sharply from about 60% this year to 27.5% next year.

Yujun Choi, Researcher at Shinhan Financial Investment: “Selective approach needed for reopening concept”

The reopening concept has become a major theme in the stock market due to a faster-than-expected transition to With-Corona. In particular, the media sector's rebound was sharp, while other sectors showed limited upward momentum. A selective approach is necessary, keeping in mind policy directions and recovery potential. The purpose of the transition in quarantine systems is to alleviate the burden on the people's economy and focus on boosting domestic demand, so it is considered effective to approach sectors with a high proportion of domestic sales.

The lifting of restrictions on dining establishments is expected to directly benefit dining, beverages, and alcoholic drinks. Travel and leisure will require more time until overseas travel normalizes, so domestic travel and airline recovery are expected first. Increased physical activities may benefit related apparel and goods. Increased activity and offline consumption recovery are also anticipated, and sectors such as apparel, footwear, semi-durable goods, and beauty equipment, which were heavily impacted by social distancing, are worth attention.

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