[MarketING] 'Earnings Are Slumping but Stock Prices Rise?' The 'Secret' of the Earnings Season Market

Stock Price Rises Despite Disappointing Earnings
Focus More on Industry Improvement Than Q4 Results

[Asia Economy Reporter Song Hwajeong] As companies continue to announce their fourth-quarter earnings results for last year, it has been observed that despite companies posting results below expectations, stock prices are not moving accordingly. The rise in stock prices despite poor earnings is interpreted as a result of lowered expectations for fourth-quarter results and a greater focus on industry improvement rather than immediate earnings.

Stock Prices Rise Despite Poor Earnings

As of 9:50 a.m. on the 10th, LG Energy Solution was trading at 479,000 KRW, up 15,000 KRW (3.23%) from the previous day. Early in the session, it rose more than 4%, touching 480,000 KRW.

Although the company posted earnings below market expectations the previous day, the stock price has continued to strengthen for three consecutive days. LG Energy Solution recorded sales of 8.5375 trillion KRW and an operating profit of 237.4 billion KRW in the fourth quarter of last year. Sales increased by 11.6% compared to the previous quarter, but operating profit decreased by 54.5%, falling 47% short of market consensus. LG Energy Solution is expected to continue experiencing weak earnings through the first quarter of this year. Samsung Securities forecasted LG Energy Solution's first-quarter operating profit at 398.9 billion KRW, 17.5% below consensus. Researcher Cho Hyunryeol of Samsung Securities explained, "If concerns about demand for global electric vehicle manufacturers materialize, it will affect battery shipments in the first quarter. To dispel demand concerns that may arise until the first quarter, sales performance capable of maintaining high operating rates will be necessary."

Despite expectations that earnings will fall short through the first quarter, the stock price is strong due to news of cooperation with U.S. automaker Ford. Bloomberg reported that Ford is partnering with LG Energy Solution to build an electric vehicle battery plant in Turkey.

Earlier, Samsung Electronics also recorded an earnings shock in the fourth quarter last year, but its stock price has risen for four consecutive days recently, recovering to the 60,000 KRW level. LG Electronics posted a fourth-quarter operating profit of 66.5 billion KRW, down 91.2% from the same period last year (745.3 billion KRW), which is 84.19% below consensus. LG Electronics also rose for four consecutive days recently, with its stock price reaching the 950,000 KRW level for the first time in about a month.

Generally, fourth-quarter earnings tend to be lower than expected due to one-off factors, and since concerns about earnings have already been priced in, stock prices after earnings announcements appear to respond more sensitively to prospects for industry recovery than to the earnings themselves.

Rotation Market Expected to Continue for the Time Being

With ongoing concerns about economic recession and the recent sharp rise in the stock market, a period of consolidation and rotation trading is expected for the time being.

Han Jiyoung, a researcher at Kiwoom Securities, said, "Looking at the recent flow of the domestic stock market, rapid price increases are occurring mainly in sectors such as semiconductors and IT home appliances, which recorded earnings shocks, and chemicals, which continue to see downward revisions in earnings forecasts and have not visibly turned around in terms of industry fundamentals. Not only between sectors but also among styles, rapid rotation trading is taking place, increasing the difficulty of market responses."

This phenomenon is analyzed to be occurring as buying demand flows into sectors that had seen little net buying from foreigners and institutions. The researcher added, "It appears that a supply-demand vacuum effect is occurring in sectors with little net buying. As long as macro uncertainties are not resolved, market participants are expected to continue rotation trading focusing on stocks with supply-demand gaps or those that have experienced excessive short-term declines."