A sector rotation may be emerging in South Korea's stock market, as market leadership spreads from semiconductors to other industries, according to a brokerage report. Chipmakers are posting record profits, but much of the market's already-elevated expectations is priced into their shares and earnings outlook. By contrast, profit forecasts for shipping, information technology hardware, construction and machinery have been improving rapidly.
Choi Jae-won, an analyst at Kiwoom Securities (039490.KS), said in a report on the 21st that earnings momentum outside semiconductors has strengthened since second-quarter results, and that investors should watch for sector diversification and a rotation trend.
Overall earnings expectations for South Korean companies are indeed rising. According to Kiwoom Securities, the combined operating profit forecast for KOSPI-listed firms this year has been revised up 5.2% to 986 trillion won ($720 billion) from 937 trillion won in early July. The forecast for next year also rose 5.1% over the same period, to 1,311 trillion won from 1,247 trillion won.
Second-quarter results were also better than expected. The share of companies beating market forecasts rose to 61.8% from 55.6% in the first quarter, and total KOSPI operating profit came in 4.1% above market estimates.
Chip Profits Hit Record, but Elevated Bar Limits Further Upgrades
The picture varies clearly by sector. Energy, IT and home appliances, chemicals and shipbuilding beat market expectations, while utilities, transportation and autos fell short, partly because of cost pressure from higher oil prices.
In absolute terms, semiconductor profits reached a record high. But market expectations had risen just as much. With second-quarter results largely in line with consensus, further upward revisions to profit forecasts after the earnings release were limited, according to analysts.
This does not mean semiconductor earnings are weak. Rather, much of the anticipated improvement has already been priced in, making it more important whether other sectors can deliver additional profit growth going forward.
Sectors outside semiconductors are indeed standing out in third-quarter forecasts. Over the past month, shipping posted the largest improvement in third-quarter earnings revision ratios, rising 25.5 percentage points. IT hardware rose 21.1 percentage points, construction 19.8 percentage points and machinery 15.1 percentage points.
Shipping, IT Hardware, Construction and Machinery: The Next Growth Axis?
Shipping fell short of market expectations in the second quarter due to cost pressure from higher oil prices, but ocean freight rates have recently stayed strong as geopolitical tensions in the Middle East lengthen ships' detour routes. As a result, third-quarter profit forecasts are being revised up quickly.
For IT hardware and machinery, investment related to artificial intelligence is cited as the driver of improving earnings. Demand for server components is expected to grow as investment in AI data centers expands, while increased semiconductor capital spending is also expected to benefit related equipment and machinery.
The construction sector, too, is drawing attention for an earnings driver distinct from the traditional housing market. As investment in industrial infrastructure such as AI data centers and semiconductor plants expands, related construction demand is increasingly likely to rise.
Analysts see this trend as more than an earnings improvement in a few sectors, viewing it as a potential trigger for a shift in the stock market's leadership. This is better understood not as the end of any particular sector's rally, but as a process in which earnings momentum concentrated in semiconductors spreads to other industries.
"With structural growth tied to AI continuing, earnings momentum is broadening out from its concentration in semiconductors," Choi said. "This is a time to watch for sector diversification and a rotation trend."
