Key Words of February Stock Market: 'V-Shaped Recovery' and 'Decoupling'

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[Asia Economy Reporter Hwang Junho] The U.S. stock market, having undergone significant adjustments due to the influence of the Federal Reserve (Fed), is expected to exhibit two key characteristics from this month until the Federal Open Market Committee (FOMC) meeting next month: a V-shaped rebound reaching previous highs and a decoupling between developed and emerging markets during the rebound process.

Moon Namjung, a researcher at Daishin Securities, analyzed in the report titled "February Stock Market Keywords: V-shaped Rebound and Decoupling" that "the V-shaped rebound is expected to occur as the Q4 earnings expectations in the U.S. last year highlight big tech companies, and the Fed’s baby steps ahead of interest rate hikes are taken into account."

In Q4 last year, the S&P 500's EPS growth rate was 26.3% year-over-year, and it has been revised upward since the start of the earnings season. The EPS growth rate, which was 22.3% YoY in the first week of January before the earnings season, has been revised upward by 4.0 percentage points as of the first week of February, indicating that the market is responding more to the "earnings momentum exceeding expectations during the earnings period" rather than the "quarterly slowing growth rate."

Among big tech companies, Apple and Alphabet’s better-than-expected strong earnings are expected to raise expectations for technology stocks that will announce earnings going forward. The EPS growth rates for IT and communication sectors in Q4 last year were 23.0% and 16.4% YoY, respectively, revised upward by 7.1 and 6.8 percentage points compared to the first week of January before the earnings season. Strong earnings at a time when technology stocks, which led the January decline in the U.S. stock market, can stimulate bargain buying are expected to support a supply-demand driven price increase.

In particular, the issue likely to be discussed before the FOMC meeting is the "magnitude of the base interest rate hike," and the Fed is expected to choose baby steps. Signs of easing high inflation in the U.S. (such as supply chain bottleneck relief: port congestion easing, decline in maritime freight indices) have appeared, and the Fed is likely to prioritize the "symbolic meaning of the first rate hike" and "minimizing financial market shocks."

However, researcher Moon stated, "The warmth of the rebound trigger centered on the U.S. has limitations in spreading to emerging markets, which are constantly exposed to economic and earnings slowdowns due to the spread of Omicron," adding, "Even if the stock market enjoys the rebound until this month (~before the March FOMC), investors should prepare to reduce exposure at previous high levels, keeping in mind a pullback in March."