South Korea's stock market in the third quarter will be driven by corporate earnings rather than interest rates, according to a new outlook. The analysis holds that the recent flow of funds into artificial intelligence (AI) shares reflects not mere expectations but earnings improvements, calling for a focus on sectors with high earnings visibility.
In a report titled "Earnings Are the Core, FOMO (Fear of Missing Out) Drives Action" published Sunday, Kim Byung-yeon, an analyst at NH Investment & Securities, cited a new capital expenditure (CAPEX) cycle centered on AI and a weaker dollar as the backdrop for the recent bull market. He explained that global stock markets have risen over the past two years as expanding AI CAPEX coincided with expectations of a weaker dollar, but that concerns over the durability of AI investment and the burden of interest rates and the dollar have grown simultaneously of late.
However, Kim assessed that it is too early to conclude the AI investment cycle has turned. "Concerns about an AI bubble should be judged by demand durability, not investment durability," he said. "As hyperscalers continue their stance of expanding CAPEX, the key variable is how long AI demand will persist rather than AI investment."
He characterized the third-quarter market as a "K-Nifty" market. Like India's representative Nifty index, the Korean market has entered a phase where the index moves around large-cap stocks with improving earnings. "The recent concentration in market capitalization is due not only to 'expectations' but to 'profits,'" Kim said. "Since it reflects profits rather than something that will deflate like a bubble, the current trend remains valid as long as earnings provide support." He added, "Concentration will ultimately follow where earnings emerge," and "the warmth is expected to spread to sectors with high earnings visibility."
He also identified the second-quarter earnings season as a watershed for the third-quarter market. "The third quarter is a period when earnings momentum strengthens," Kim said. "The second-quarter earnings season will be a process of distinguishing sectors with earnings momentum that overcomes interest rates from those that do not."
He projected that the macro environment would also support an earnings-driven market. With the U.S. Federal Reserve (Fed) likely to hold its benchmark interest rate for a certain period, the downward rigidity of rates and the dollar may continue, but differentiation will ultimately deepen between industries whose value-added growth rates exceed interest rates and those that do not, he expected.
As promising investment themes for the third quarter, he presented AI infrastructure and the "Korea WAVE." Within AI infrastructure, he named Samsung Electronics, SK hynix, LG Energy Solution, Doosan Enerbility and LS Electric as stocks to watch. For the Korea WAVE, he presented Hyundai Department Store, Korean Air, SK, Samsung Securities and APR. He projected that earnings improvements at premium consumption sectors such as department stores and hotels are also expected, as the asset effect stemming from semiconductors coincides with expanding inbound demand based on K-culture.
