Lower 3rd Quarter Earnings Expectations Due to Weak IT Sector Performance

There have been opinions suggesting that expectations for third-quarter earnings should be lowered due to the sluggish performance of the IT sector, which holds a significant weight in overall earnings. However, since the annual earnings are likely to hit an all-time high, the second half of the year should be viewed as a period with high annual earnings levels but weakening momentum.

On the 8th, Dongchan Yeom, a researcher at Korea Investment & Securities, analyzed in a report that "Ahead of the earnings season, profit estimates are being revised downward, and the second half of the year typically shows seasonal earnings below expectations compared to the first half, with the achievement rate of first-half earnings relative to annual earnings being lower than the historical average." For these reasons, he suggested lowering expectations for third-quarter earnings.

Nevertheless, despite these concerns, Yeom projected that annual earnings are highly likely to set a new record. He explained, "For this year's operating profit (216 trillion won) to fall below the previous record set in 2021 (217 trillion won), second-half operating profit would need to be revised downward by more than 30%, which is unlikely. Therefore, the annual earnings level is high, but the momentum should be regarded as weakening."

The sector leading the recent downward revisions in profit estimates is the IT sector. Yeom pointed out, "Samsung Electronics accounts for more than half of the overall earnings revisions in September," adding, "The sluggishness of the IT sector, which holds a large share in earnings, is one of the reasons why third-quarter earnings are difficult to view favorably."

So, how do earnings during periods of interest rate cuts differ from the past? Regarding this, Yeom evaluated that a decline in market interest rates is positive from the earnings perspective due to reduced interest expenses, and from the valuation perspective due to a decrease in discount rates.

However, looking at past data, since interest expenses change with about a one-year lag, Yeom advised that it is necessary to focus more on sectors whose earnings or valuations improved during periods of interest rate cuts rather than solely on interest expense aspects.