[Good Morning Stock Market] US S&P and Nasdaq Hit New Highs Again... "Find Beneficiary Stocks in Han"

Still Expecting a Market with Sector Differentiation

On the 27th (local time), at the trading floor of the New York Stock Exchange (NYSE) in the United States, traders were working while a TV screen showed Federal Reserve Chairman Jerome Powell delivering a speech. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market hit new highs again, but a clear divergence appeared as large tech stocks showed strong performance while sectors related to economic normalization lagged. Analysts predict that a similar stock differentiation will occur in the domestic market, focusing on sectors that can benefit from the strength of major U.S. tech stocks.

On the 30th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 35,399.84, down 0.16% from the previous day. The S&P 500 index rose 0.43% to 4,528.79, and the tech-heavy Nasdaq index closed up 0.90% at 15,265.89. Both the S&P 500 and Nasdaq indices set new all-time highs again. This appears to be influenced by Federal Reserve Chairman Jerome Powell’s remarks mentioning the possibility of tapering (reducing asset purchases) within the year while clearly drawing a line that interest rate hikes are still distant.

◆Sangyoung Seo, Researcher at Mirae Asset Securities= The U.S. stock market showed strength digesting Chairman Powell’s comments, but the rally was mainly centered on individual companies with some positive news, while most stocks underwent a selling digestion process. The divergence continued as sectors related to economic normalization, which had recently shown gains, weakened amid renewed concerns over COVID-19, such as the European Union (EU) announcing the exclusion of the U.S. from its safe travel list.

Apple’s rise was particularly notable. This was influenced by a report from Ming-Chi Kuo of TFI Securities stating that the iPhone 13 will feature low-earth orbit satellite communication capabilities. Amazon also showed strength after announcing a collaboration with fintech company Affirm Holdings to offer buy-now-pay-later services.

In the domestic market, stock differentiation is expected to unfold based on individual corporate issues. Attention should be paid to the weakness in gaming-related stocks following the Chinese government’s regulatory announcements on the gaming industry, the underperformance of financial and economic normalization-related companies, weakness in the automobile sector, stocks related to satellite services which are a factor in Apple’s rise, and sectors benefiting from COVID-19.

Economic indicators such as the U.S. employment report also warrant close attention. The Purchasing Managers' Index (PMI) for manufacturing and services in China, released at 10 a.m., is important. It is expected to slightly slow compared to last month. Depending on the impact of COVID-19, the index could fall below the baseline of 50. If it falls short of market expectations, concerns about economic slowdown may lead to widespread selling pressure, but if it exceeds expectations, buying demand could increase and drive index gains.

◆Seonghwan Kim, Researcher at Shinhan Investment Corp.= The 12-month forward price-to-earnings ratio (PER) of the S&P 500 hovers in the low 21 times range. This is the lower bound of valuation during the bull market since the COVID-19 pandemic. Since June last year, the S&P 500’s 12-month forward PER has fluctuated around 21 to 23 times. The stock price has consistently found support at the 21 times level.

The average PER of 22 times applied to the U.S. stock market post-pandemic is nearly 35% higher than the historical average of 16 times. This is due to unprecedented liquidity and the rapid pace of corporate earnings normalization. The rebound speed of the 12-month forward earnings per share (EPS) was the fastest in history, and in the second quarter of this year, the EPS growth rate reached 94.7% year-over-year, maximizing momentum.

However, factors contributing to the valuation premium in the U.S. stock market are gradually weakening. It is only a matter of time before the Fed begins tapering. Doubts may increase about whether the PER above 21 times can be maintained. Earnings momentum passed its peak in the second quarter, and earnings forecasts can no longer be considered conservatively optimistic.

Although positive and negative factors coexist, it is not yet time to prepare for a full-scale downward adjustment. The likelihood of the Fed aggressively raising interest rates in the short term or a significant decline in economic or earnings expectations appears low. Despite tapering and earnings cycle normalization, the U.S. stock market’s PER is expected to experience a soft landing rather than a hard landing. If growth opportunities remain, it is premature to reduce stock weightings due to price burdens. A slight valuation adjustment is inevitable, but a path of mild downward stabilization from the current level seems reasonable. Some sectors have already begun to shed price burdens.