[Good Morning Stock Market] Fed's Speed Adjustment VS Collapsed Big Tech... Sector-by-Sector Fluctuation Differentiation

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] On the 27th, the domestic stock market is expected to show clear differentiation in sectoral gains and losses. The rebound rally in the U.S. New York stock market is likely to be affected by the disappointing earnings of big tech companies. With mixed factors including the upside expectation of the Federal Reserve's (Fed) interest rate hike slowdown and the downside concerns over U.S. big tech earnings, the market is expected to move according to individual issues.

The New York stock market ended its rally due to disappointing earnings and outlooks from big tech companies. On the 26th (local time), the Dow Jones Industrial Average closed at 31,839.11, up 2.37 points (0.01%) from the previous session. The Dow rose more than 300 points during the day but gave up most of the gains near the close, finishing flat. The Standard & Poor's (S&P) 500 index closed down 28.51 points (0.74%) at 3,830.60, and the tech-heavy Nasdaq index plunged 228.12 points (2.04%) to 10,970.99.

The three-day consecutive rally of the three major New York stock indices, which began on speculation of a possible Fed interest rate hike slowdown in December, came to an end. U.S. media assessed that the disappointing Q3 earnings of big tech companies, which attracted market attention, triggered a sell-off in tech stocks from the outset. Microsoft (MS) and Alphabet, Google's parent company, released Q3 earnings after the previous day's close that fell short of market expectations, dampening overall investor sentiment. Alphabet, which missed Wall Street analysts' forecasts in both revenue and net income, plunged 9.1%, while MS, despite decent earnings, saw a 7.7% drop due to disappointing cloud segment sales. MS's Q4 outlook also fell short of market expectations, acting as a negative factor. Particularly for Alphabet, worse-than-expected online advertising results from YouTube and others fueled recession fears. This represents a breakdown in one pillar of the recent market support from Fed pivot expectations and strong corporate earnings.

Seo Sang-young, Researcher at Mirae Asset Securities

The U.S. stock market's decline, centered on Nasdaq due to the sell-off triggered by the slowdown in big tech earnings, is a burden for the Korean stock market. However, since much of this was already reflected the previous day, the impact is expected to be limited. More noteworthy is the expansion of the dollar's weakness and the decline in U.S. Treasury yields, although their impact on the U.S. stock market was limited. This could lead to a stronger Korean won, with the won-dollar exchange rate falling by about 16 won, which is expected to have a positive effect on foreign investor demand.

Additionally, although Nasdaq fell, indices that influence the Korean stock market, such as the small- and mid-cap Russell 2000 index, which rose 0.46%, and the Dow Transportation index, which increased by 1.36%, showed solid performance. Whether the Chinese stock market, which was one of the factors behind the Korean market's rise the previous day, continues to show strength today will likely determine whether the Korean stock market can extend its gains. Considering this, the Korean stock market is expected to start up about 0.7% and then focus on the movement of the Chinese stock market.

Han Ji-young, Researcher at Kiwoom Securities

As seen in the business environments presented by big tech companies such as Alphabet and MS, which recently announced Q3 earnings, as well as major domestic companies like Samsung Electronics and Hyundai Motor, negative macroeconomic factors such as tightening and inflation are affecting individual industries and corporate fundamentals. Although stock prices tend to fluctuate more based on how earnings meet market expectations than on the earnings themselves, the fact that companies failed to meet the already lowered expectations before the Q3 earnings season suggests that customer demand is weaker than anticipated. Korean export companies can benefit from exchange rate effects, but if macroeconomic uncertainties continue to spread, demand could be negatively affected, diminishing the overall impact of exchange rate effects on earnings. Also, regarding the yield curve, which is considered a leading indicator of recession, the 10-year minus 3-month spread recently turned negative for the first time since the 2020 pandemic, whereas previously the 10-year minus 2-year spread had turned negative but the 10-year minus 3-month spread remained positive. Although there is typically a 6 to 18 month lag between yield curve inversion and actual recession, financial markets appear to be preparing for a downturn. However, attention should be paid to the recent rise in Fed pivot expectations.

Considering that the Bank of Canada, which was expected to raise rates by 0.75 percentage points, actually raised by only 0.5 percentage points, it is necessary to keep open the possibility of a Fed slowdown in rate hikes, if not a full pivot to rate cuts. Furthermore, with other central banks such as the People's Bank of China and the Bank of Japan intervening in currency markets to ease the dollar's strength, efforts to contain the side effects of tightening are emerging among major policymakers. Therefore, market participants should avoid excessive downside bets at this time. The domestic stock market closed mixed the previous day (KOSPI +0.7%, KOSDAQ -0.8%) due to semiconductor stock strength on expectations of a bottom in the industry and rotation of funds into semiconductors from other sectors. Today, with mixed factors including global dollar weakness and Fed slowdown expectations as upside factors and concerns over U.S. big tech earnings as downside factors, differentiated sectoral movements are expected. Although the sharp drop in U.S. big tech stocks such as Alphabet and MS was largely pre-reflected in the domestic market the previous day, Meta's 5.6% drop after hours due to earnings shock from metaverse business weakness and advertising revenue decline, followed by an 18% plunge in after-hours trading, is expected to negatively affect investor sentiment in related thematic and growth stocks today.

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