[Good Morning Stock Market] "US Stocks Show Confidence in Earnings and Economy, Will Domestic Market React?"

Strong Corporate Earnings and Economic Confidence
Push Nasdaq Index Up 2.6%

"Limited Stock Impact Despite Annual Profit Downgrade"

[Asia Economy Reporter Minji Lee] The U.S. stock market closed higher, driven by strong corporate earnings reports and positive economic indicators. Analysis suggesting that the confrontation between the U.S. and China will not escalate significantly also contributed positively. Accordingly, the domestic stock market is expected to show an upward trend today.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Nasdaq rises over 2% due to analysis of technology stocks being oversold”

[Image source=Yonhap News]

The U.S. stock market started higher, led by companies reporting solid earnings, and closed higher as concerns about a recession eased following improvements in economic indicators. The Nasdaq index rose 2.6%, while the Dow Jones and S&P 500 indices increased by 1.29% and 1.6%, respectively.

The U.S. ISM Services Index for July recorded 56.7, surpassing last month's figure of 55.3, easing recession concerns. Looking at the subcomponents, new orders improved from 55.6 to 59.9, and the employment index was favorable, rising from 47.4 to 49.1. The supply index slowed from 61.9 to 57.8, indicating a continued easing of supply chain concerns. China's July Caixin Services PMI also rose to 55.5, exceeding last month's 54.5.

Companies reporting strong earnings included Starbucks (4%), PayPal (9%), Sophia (28%), Gilead Sciences (5%), and EA (3.4%), all closing higher. Ford (3.5%) was positively influenced by news that its sales last month surged over 36% year-on-year. Following Citigroup's analysis that technology stocks were oversold, Amazon (4%), Meta Platforms (5.4%), and Disney (4%) also rose.

Considering these factors, the domestic stock market is expected to continue its upward trend today. The mention of overselling in large technology stocks and confidence in the economy lifted the U.S. stock market. Although the passage of the U.S. semiconductor support law and announcements of some Chinese companies canceling investments in the U.S. pose burdens, it is predicted that the situation will not escalate to an extreme level.

Jungyeon Lee, Researcher at Meritz Securities: “Despite macro concerns, the Q2 earnings season is solid”

As the Q2 earnings season is about halfway through, Korea has mostly completed earnings announcements centered on large-cap stocks. This earnings season attracted significant investor attention due to concerns about corporate profit burdens from rising raw material prices and recession fears, which lowered expectations for revenue growth.

KOSPI-listed companies' earnings exceeded expectations by 3% in sales, 5% in operating profit, and 7% in net profit. Although the rate of exceeding estimates was lower than the 10% level recorded over the past two years, it is analyzed as a strong performance given the ongoing economic uncertainties. Notably, the rate of exceeding operating profit estimates was higher than that of sales, suggesting that price pass-through due to rising raw material costs was better than expected.

By sector, energy and consumer discretionary sectors showed notable earnings resilience. Specifically, the automotive segment within consumer discretionary drove a positive atmosphere. Defensive sectors underperformed expectations, while cyclical sectors such as financials and industrials performed well.

Conversely, the IT and communication services sectors fell short of expectations. Semiconductor earnings within the IT sector were the weakest, and IT hardware and display sectors also underperformed.

A concerning point is the strong downward revision of profit forecasts before and after earnings announcements. KOSPI operating profit forecasts began to be revised downward since June. Over the past two months, operating profit forecasts for 2022 and 2023 were lowered by 3.2% and 7.1%, respectively.

However, since optimistic or pessimistic profit forecasts by sector continue to be reflected in stock prices, the downward revision of profit forecasts is unlikely to significantly drag down stock prices. In fact, sectors with pessimistic Q2 forecasts saw considerable stock price increases despite earnings meeting expectations. In conclusion, it appears that stock prices have already largely priced in sector-specific profit outlooks.

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