[MarketING] The Moment When Confirming the Earnings Bottom Becomes Crucial

KOSPI Fluctuates in a Narrow Range
Performance Bottom Confirmation Needed for Further Rise

[Asia Economy Reporter Song Hwajeong] The KOSPI is moving within a narrow range. As a wait-and-see stance continues, resulting in a box range market, confirming the bottom of corporate earnings is expected to be crucial for further gains.

KOSPI Turns Up After a Decline at the Start

As of 10:20 a.m. on the 21st, the KOSPI was at 2,456.42, up 1.3 points (0.05%) from the previous day. The KOSDAQ rose 0.09 points (0.01%) to 788.98. Both indices started lower but have been fluctuating within a narrow range.

The domestic stock market is expected to continue a stock-specific market amid the process of digesting sell-offs. Seosangyoung, a researcher at Mirae Asset Securities, said, "While the U.S. stock market was closed yesterday, the European stock markets showed no clear direction, with profit-taking selling emerging mainly in sectors that had seen significant gains, showing sector differentiation characteristics. The Korean stock market will also continue the process of digesting sell-offs amid differentiation."

With stock prices expected to remain sluggish within a box range, opinions suggest that confirming the bottom of corporate earnings is necessary for further gains. Kim Jae-eun, a researcher at NH Investment & Securities, said, "The recent weakening of the dollar trend has paused, and the global broad money supply (M2) growth rate has slightly declined, weakening the momentum for stock price increases. At this point, to secure additional momentum for stock price gains, confidence that the earnings bottom is near is needed."

Currently, based on the 12-month forward earnings per share (EPS), the KOSPI EPS decline cycle has been ongoing for 18 months. Kim said, "Investor interest will shift to whether corporate profits improve. Since stock returns are expected to increasingly rely on corporate earnings growth, it is necessary to see a moderation in the downward revision trend of KOSPI corporate earnings forecasts and a turnaround."

Last year's KOSPI earnings explain the current index level. Lee Jeong-yeon, a researcher at Meritz Securities, analyzed, "Considering the earnings announcements so far, last year's KOSPI net profit is expected to be 153 trillion won, but excluding Samsung Electronics' one-time gains, net profit is 134 trillion won. At this point, with this year's net profit also expected to be 130 trillion won, the index level corresponding to net profits in the low to mid-100 trillion won range was 2,100 to 2,600 points (2017, 2018), which explains why the index has been moving between 2,100 and 2,500 points since the second half of last year."

Since most companies made large-scale big bath (massive loss recognition) in the fourth quarter, it is highly likely that last year's fourth-quarter earnings represent the bottom. To assess whether corporate profits will improve, it is first necessary to confirm the bottom of the KOSPI 12-month forward EPS growth rate. In the past, the index also rose when the EPS growth rate bottomed out. Kim said, "The downward revision of KOSPI earnings forecasts has been largely reflected, and the bottom of various earnings-related indicators such as quarterly operating profit and 12-month forward EPS can be confirmed in the first or second quarter."

Final Stage of Earnings Downgrade

Considering that the earnings downgrade is in its final stage, the stock price correction is expected to be a buying opportunity at a low price.

Kim said, "Although KOSPI earnings forecasts are still being revised downward, they are approaching the bottom. Stock prices may be adjusted due to concerns that the pace of inflation easing may not be faster than expected, but considering that the earnings downgrade is in its final stage, stock price corrections should be seen as buying opportunities."

If expectations for earnings growth next year are reflected, the 12-month forward EPS is expected to gradually rise. Lee predicted, "If earnings growth expectations of over 40% for 2024 are reflected in the 12-month forward EPS, the 12-month forward EPS will show an upward trend as it approaches the second half of the year."