[Good Morning Stock Market] US Stocks Shift from Cyclical to Tech Stocks Again on Stimulus Expectations

Timing of Rebalancing Coincides with Fund Flows into Technology and Growth Stocks
Impact on Domestic Stock Market...Strong Performance Expected Mainly in Growth Stocks like Semiconductors

[Image source=AP Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market showed strength in technology and growth stocks following the Biden administration's announcement of an infrastructure stimulus plan. There appeared to be a shift of funds from the recently strong cyclical sectors. The domestic stock market is also expected to see gains centered on the semiconductor sector and growth stocks, reflecting this trend.

On the 31st of last month (local time), the Nasdaq index closed at 13,246.87, up 1.54% at the New York Stock Exchange. The S&P 500 index also rose 0.36% to 3,972.89. Meanwhile, the Dow Jones Industrial Average fell 0.26% to 32,981.55. The stabilization of the U.S. 10-year Treasury yield at around 1.73%, which had recently surged and triggered profit-taking in growth stocks, is interpreted as a factor behind the strength in technology and growth stocks. Additionally, the Biden administration's infrastructure stimulus plan meeting expectations led to a shift of funds from the recently strong cyclical sectors to the technology and growth stocks that had been sluggish recently, driven by quarter-end rebalancing demand.

◆ Yumi Kim, Economist at Kiwoom Securities = The Biden administration announced a $2.25 trillion (approximately 2,543 trillion KRW) infrastructure investment plan. The main points include $621 billion for infrastructure investments such as bridges and roads, $580 billion to strengthen U.S. manufacturing, and $400 billion for support for the elderly and disabled. Following this news, profit-taking selling appeared, causing traditional infrastructure-related stocks to show weak performance. On the other hand, the allocation of $174 billion to support the electric vehicle industry led to strength in related sectors such as Tesla. Meanwhile, the infrastructure investment funds are expected to be raised through tax increases, including raising the corporate tax rate from the current 21% to 28%.

Among the S&P 500 sectors, 5 out of 11 sectors rose, including IT (+1.5%), consumer discretionary (+0.83%), utilities (+0.65%), and communication services (+0.4%). Sectors that had recently been strong, such as energy (-0.93%), financials (-0.9%), and materials (-0.49%), showed weakness. Overall, as the stimulus plan fell short of expectations, there was a market trend of selling recently strong cyclical stocks. In contrast, large technology stocks centered on Apple and Microsoft showed strength.

This influence is also expected to affect the domestic stock market. The upward momentum of cyclical stocks is expected to slow, leading to sectoral differentiation. Notably, Micron Technology's earnings, announced after the U.S. market close, exceeded expectations, with shares rising nearly 2% in after-hours trading. Considering that the domestic market index closed lower on the last trading day of the quarter due to rebalancing selling pressure centered on large semiconductor stocks despite the U.S. 10-year Treasury yield falling to around 1.72% during the day, gains centered on the semiconductor sector and growth stocks are anticipated. However, depending on the detailed content of the U.S. infrastructure investment to be announced during the day, some sectors within the cyclical industries may stand out.

◆ Daehun Han, Researcher at SK Securities = The funding for the Biden administration's infrastructure investment plan is expected to be covered through corporate taxes. Although the corporate tax rate will rise to 28% from the previous 21%, there is no inclusion of an increase in personal income tax rates. The corporate tax increase to 28%, higher than the previously expected 25%, makes downward revisions to corporate earnings estimates inevitable. Given that the Trump administration's corporate tax cuts led to increased corporate profits and stock price rises, the tax hike is unwelcome news.

Therefore, it is a time when sectors that can offset the corporate tax increase through policy support will become more attractive. These include infrastructure-related sectors such as construction, building materials, and steel; eco-friendly sectors related to the expansion of electric vehicle charging facilities; and semiconductor and communication sectors due to 5G infrastructure construction and semiconductor development. The rise in stock prices of companies related to the Philadelphia Semiconductor Index supports this view.

◆ Jaeim Kim, Researcher at Hana Financial Investment = The main points of the U.S. first infrastructure investment plan are infrastructure projects to rebuild the aging land transportation system such as roads and railways, the construction of ultra-high-speed internet networks, support for expanding electric vehicle supply, and eco-friendly energy support measures. The president's announcement of eco-friendly energy support measures is expected to be a positive factor for stocks related to solar power and other renewable energy sources. Major green energy stocks have experienced sharp rises since the second half of last year, resulting in high volatility this year. Detailed policy announcements are expected to serve as momentum for further gains. Attention is focused on solar microinverter manufacturer ENPH (Enphase Energy), solar panel module manufacturer FSLR (First Solar), and comprehensive solar equipment solution provider RUN (Sunrun). Additionally, NextEra Energy (NEE), the leading U.S. utility company and the world's largest in terms of eco-friendly energy generation, is notable for its scale differentiation, order competitiveness, and relative stability.

There are many factors to consider, including the scale of infrastructure investment compared to market expectations, various hurdles until congressional approval, and increased volatility in momentum stocks. However, considering the medium- to long-term earnings benefits from policy support, it is judged that good investment opportunities can be found amid short-term stock price movements.