[MarketING] Stock Market Bets on Tightening End Despite Indications of Additional Rate Hikes

KOSPI Rises After 3 Days
Expectations for End of Tightening Cycle Remain

The KOSPI is showing an upward trend for the first time in three days. Although the U.S. Federal Reserve (Fed) hinted at the possibility of two additional interest rate hikes, the persistent expectation of the end of the tightening cycle appears to be influencing investor sentiment. As the Q2 earnings season approaches, opinions suggest that future stock price momentum will be driven more by fundamentals than by valuation.

KOSPI Rises for the First Time in Three Days

As of 10:15 a.m. on the 16th, the KOSPI was up 10.05 points (0.39%) from the previous day, standing at 2618.59. The KOSDAQ rose 8.80 points (1.00%) to 886.84.

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The previous day’s rise in the U.S. stock market, driven by expectations of the end of the tightening cycle, seems to have led to strength in the domestic market. On the 15th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 1.26%, the S&P 500 increased by 1.22%, and the Nasdaq rose 1.15%, all showing gains exceeding 1%.

Han Ji-young, a researcher at Kiwoom Securities, explained, "Despite mixed real economy indicators such as the hawkish European Central Bank (ECB) meeting, rising U.S. retail sales, and declining industrial production, the U.S. stock market rose, buoyed by expectations of the end of the tightening cycle after the June Federal Open Market Committee (FOMC) meeting."

While the Fed kept interest rates unchanged, the ECB raised its benchmark rate by 25 basis points (1bp = 0.01 percentage points) from 3.25% to 3.50%. The ECB stated that although inflation is declining, it is expected to remain very high for an extended period, and the rate hike was decided to reach the 2% target.

U.S. real economy indicators for May showed mixed results. Retail sales in May increased by 0.3% month-over-month, slowing from 0.4% the previous month but exceeding expectations (-0.1%). Conversely, industrial production in May slowed from a previously reported 0.5% increase to a 0.2% decrease, falling short of the expected 0.1% increase.

Seo Sang-young, a researcher at Mirae Asset Securities, analyzed, "Consumption remained solid while production showed contraction, indicating a differentiated pattern. Despite improved consumption, excluding automobiles, the increase was only 0.1%, maintaining concerns about the economy." He added, "As a result, despite the Fed hinting at additional rate hikes, the Chicago Mercantile Exchange (CME) FedWatch tool projects a rate hike in July followed by a cut in December, leading to a decline in Treasury yields and a rise in stock indices."

Depending on the June economic indicators, if the likelihood of a rate hold in July increases, it could serve as an additional driver for stock market gains. The researcher said, "Although the Fed hinted at the possibility of two more rate hikes this year, the market seems skeptical. Fed Chair Jerome Powell mentioned that the decision on a July rate hike would depend on upcoming inflation and employment data. With four meetings remaining this year and expectations of further inflation decline and employment slowdown in June, two additional hikes would be burdensome even for the Fed." He added, "The market currently prices in the possibility of a July hike, but if June data increases the likelihood of a hold in July, it could act as an additional catalyst for stock market gains."

Upcoming Q2 Earnings Season... Stock Price Momentum to Be Driven by 'Fundamentals'

As the Fed hinted at additional rate hikes, expectations for rate cuts in the second half of the year have somewhat diminished, and future stock price momentum is expected to be driven by earnings.

Na Jeong-hwan, a researcher at NH Investment & Securities, said, "With reduced expectations for rate cuts in the second half, stock price momentum will be based more on fundamentals than valuation. Attention will shift to sectors expected to show earnings turnarounds ahead of the Q2 earnings season."

There is an opinion that short-term corrections could be an opportunity to increase exposure to sectors expected to improve earnings in the second half. Researcher Na said, "The KOSPI has been correcting after reaching 2650 points. Factors such as uncertainty over Fed monetary policy and valuation pressures are causing the correction, but as the Q2 earnings season begins and visibility of earnings turnarounds in the second half improves, stock prices are expected to rise again in the second half." He added, "If short-term corrections occur, it is necessary to use the opportunity to increase exposure to sectors like semiconductors and shipbuilding, which are expected to see earnings improvements in the second half."

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