Volatile Market... "There May Be More Room for Further Decline"

KOSPI and S&P 500 Volatility Increase
Interest Rate Cuts and Stock Market Declines May Occur Together
Leading Stocks Driving the Market, Semiconductors and AI Must Prove Profitability

Market volatility is increasing. Various variables such as controversies over artificial intelligence (AI) profitability and expectations of a rate cut in September are mixed, causing confusion among market participants. The securities industry warns that there may still be room for further declines in the recently adjusting stock market.

According to the Korea Exchange on the 2nd, the KOSPI closed at 2777.68 the previous day. Last month, the KOSPI showed significant volatility, dropping as low as the 2700 level during trading hours, down 6.6% from its peak. During the same period, the S&P 500 index, composed mainly of large-cap stocks in the U.S. market, fell by 4.9%. The uncertainty surrounding the U.S. presidential election, with a close race in approval ratings between Donald Trump, the Republican candidate, and Vice President Kamala Harris, as well as the decline in the U.S. stock market centered on big tech companies that have driven record semiconductor investments, appear to have also impacted the domestic stock market.

In the securities industry, voices suggest that there is still room for the market to decline further. Hyunki Kang, a researcher at DB Financial Investment, pointed out that recently, the market has shown weakness in leading stocks such as semiconductors and strength in peripheral stocks that are not semiconductors, stating, "In a declining market, the fluctuation of leading stocks is large, while the fluctuation of peripheral stocks is relatively small," and added, "Usually, a market that undergoes a simple correction has strong leading stocks and large fluctuations in peripheral stocks. That is not the case now."

Researcher Kang also said, "Many recent economic indicators show economic fluctuations," adding, "In such a situation, it is difficult to find excess return targets worth investing in by borrowing funds, so even if the central bank implements a rate cut, the demand for funds from economic agents does not immediately increase. Only when rate cuts proceed sufficiently and the perception that rates have bottomed out emerges will demand arise." He advised, "We should keep in mind that for a certain period going forward, rate cuts, economic fluctuations, and market declines may occur simultaneously."

There is also analysis that the possibility of a slowdown in the profit growth rate of U.S. big tech companies is influencing downward pressure on the stock market. Jaehwan Heo, a researcher at Eugene Investment & Securities, said, "The recent performance of U.S. big tech is good, but concerns about a slowdown in growth rate should be watched," and analyzed, "The capital expenditure (CAPEX) growth rate of these companies, which are the main demanders of semiconductors, may also decline." He added, "Considering the uncertainty of the U.S. presidential election, it is necessary to lower expected returns for the second half of the year."

It remains a challenge for AI semiconductor-related companies, which account for a large portion of market capitalization, to prove profitability from AI investments. Jaeseok Ha, a researcher at NH Investment & Securities, said, "There is a noticeable change in investors' views on the profitability of the AI industry that has led the market," adding, "The risk factors initially expected to affect the market from the fourth quarter are being reflected faster than anticipated." He continued, "Since market volatility is expected to remain high for the time being, if you hold an AI-centered portfolio, it is necessary to consider diversified investments to reduce risk."