"Domestic Stock Market 'Q4 Earnings Shock' Expected... Need for a Conservative Perspective Shift"

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[Asia Economy Reporter Ji Yeon-jin] Although the domestic stock market has been on an upward trend this month, analysis suggests that this is a technical rebound rather than confidence in the strength of our economy. With concerns about economic slowdown and inflationary pressures reaching their highest levels in 40 years, and global stock market valuations at historic highs, experts advise a shift to a more conservative perspective.

According to BNK Investment & Securities on the 12th, the Organization for Economic Cooperation and Development (OECD) Leading Economic Index has been gradually declining since peaking in June this year. This contrasts with the faster decline in Korea’s Leading Economic Index cyclical component, which is attributed to advanced countries’ stock markets still maintaining high levels.

It is also noted as unusual that the trust index between companies and consumers is showing extreme trends due to rising inflation. Since a rapid decline in the Consumer Confidence Index is likely to lead to a downturn in the Business Confidence Index, concerns about an economic slowdown next year may increase.

In the United States, the unemployment rate fell last month due to an increase in employment in the agricultural sector. Considering the consumer price level, which rose to its highest in 40 years, the appropriate interest rate according to the Taylor rule is also expected to rise to the highest level since 1982. The Taylor rule is a theory that central banks adjust policy interest rates when the actual inflation rate and actual economic growth rate deviate from the inflation target and potential growth rate, respectively. Based on the expected Core Personal Consumption Expenditures (Core PCE), it is projected to surge to 8.55%.

Kim Seong-no, a researcher at BNK Investment & Securities, said, "Although consumer prices in advanced countries are expected to turn downward in the second quarter of next year, it is true that consumer prices have already risen to stagflation levels (a situation where prices soar without economic growth). This week’s U.S. Federal Open Market Committee (FOMC) meeting will be a crucial variable for financial markets in terms of how the Fed’s perception of inflation changes."

Based on the price-to-book ratio, the U.S. stock market has reached its highest level since 2000. However, the U.S. offsets concerns about economic slowdown and rising inflation with high expectations for corporate earnings. In contrast, the Korean market has experienced earnings shocks every fourth quarter regardless of economic conditions, according to researcher Kim. He stated, "Given that the operating profit margin of KOSPI manufacturing in the fourth quarter this year is higher than in previous quarters, it seems difficult to avoid an earnings shock this year as well. With concerns about economic slowdown and inflationary pressures reaching their highest levels in 40 years, and global stock market valuations at historic highs, a shift to a conservative perspective appears necessary."

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