[Good Morning Market] How Long Will the Rally Last?... Differentiation Expected as U.S. Market Sets the Tone

Profit-Taking Emerges After Consecutive Gains
Focus on U.S. PCE and Micron Earnings

The New York Stock Exchange reached an all-time high following the U.S. Federal Reserve’s interest rate cut. The domestic stock market, which also experienced a record-breaking rally, is expected to show a differentiated trend as it digests profit-taking and remains cautious ahead of key economic indicators, such as the U.S. Personal Consumption Expenditures (PCE) price index and inflation expectations.

Close Attention to Fed Officials’ Remarks... Further Gains VS Bubble Concerns

The Federal Reserve lowered its benchmark interest rate by 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting held on September 17-18, and also hinted at the possibility of two additional rate cuts within the year. While the U.S. economy is not in a recession, concerns about employment persist.

However, if high inflation continues, there is a possibility that rates could be maintained for a longer period. This is why attention is focused on this week’s major U.S. economic indicators. Key data releases are scheduled, including the revised second-quarter Gross Domestic Product (GDP), manufacturing and service sector indices, and the PCE price index. Federal Reserve Chair Jerome Powell is also set to deliver a speech. With the FOMC meeting concluded, major Fed officials are expected to share their views on the future path of interest rates. Market volatility is likely to increase.

Although the share prices of the so-called “Magnificent 7 (M7)” large-cap tech stocks have soared to levels reminiscent of past stock market bubbles, some analysts believe there is still room for further gains. According to Yahoo Finance on September 22, Michael Hartnett, a strategist at Bank of America, stated in a client report, “If the current situation is a bubble, it does not appear ready to burst yet.” He noted that, based on research into more than 100 years of stock market bubbles, the average rise from trough to peak was 244%, while the M7 have risen 223% since their March 2023 lows. The investment fervor in U.S. big tech, centered on the M7, is considered a driving force behind the record highs in the U.S. stock market.

Jeff Krumpelman, chief strategist at Mariner Wealth Advisors, also emphasized, “Artificial intelligence (AI) is boosting productivity and justifying improvements in corporate earnings,” adding, “We are only in the early stages of the AI era.” However, he also warned, “If the market experiences a melt-up triggered by the Fed’s rate cuts, it could become concerning.”

Emily Roland, chief strategist at John Hancock Investment, said, “This rally is a kind of ‘honeymoon rally’ driven by rate cuts rather than a worsening job market,” warning, “Because economic fundamentals have not been significantly damaged, investors tend to ignore warning signs.”

Profit-Taking Urge Amid Short-Term Rally... Focus on Micron’s Earnings

The domestic stock market is expected to show sector-specific differentiation as it absorbs short-term profit-taking. As in the U.S., fatigue from the recent rally is accumulating, so the release of inflation-related indicators, such as the August PCE, during the week could provide a temporary justification for profit-taking.

Market participants are also expected to closely watch the earnings of Micron Technology, scheduled for September 23 (local time) in the U.S. Micron’s stock price has surged by about 37% this month alone, driven by strong demand from increased big tech investment and rising DRAM prices due to supply shortages. This positive momentum has extended to the domestic market, with Samsung Electronics and SK Hynix rising by 14.3% and 31.0%, respectively.

As of September 20, the MSCI Korea ETF, which tracks the domestic stock market, fell by 0.87%. The MSCI Emerging Markets ETF also declined by 0.23%. The Philadelphia Semiconductor Index dropped by 0.73% as well.

Han Jiyoung, a researcher at Kiwoom Securities, explained, “Since September, foreign investors’ net buying has been concentrated in the semiconductor sector, so Micron’s earnings are expected to impact KOSPI prices and foreign capital flows.” She added, “Rather than this quarter’s earnings results, the key points to watch will be whether demand for high-bandwidth memory (HBM) remains strong and whether the upward trend in DRAM and NAND prices continues.”