"Year-End Stock Market: Focus on Earnings Forecasts" [Click eStock]

Trading Value Declines in December...
Foreign Investors and Institutions Reduce Activity for Year-End Settlement
Focus Needed on Sectors Where Earnings Outlook and Stock Price Direction Align

December is expected to see subdued stock trading activity, with market volatility likely to increase depending on the presence of negative factors. As earnings forecasts become increasingly important, analysts suggest focusing on sectors with upward earnings revisions.

On December 1, Korea Investment & Securities assessed that the investment environment for the final month of the year would not be favorable. The firm noted that overall market sentiment has yet to recover. This is particularly evident in trading volume. On November 28, the trading value on the KOSPI was 11.901 trillion won, marking a decline for the second consecutive day. This figure is less than half of the 29.1483 trillion won recorded on November 5.

The typically sluggish trading activity in December is also a concern. Major market participants such as foreign investors and institutions tend to reduce their trading as they prepare for year-end settlements. In this environment, if both domestic and external negative factors overlap, market volatility could increase further, resulting in more frequent stock price fluctuations.

The key is to identify the factors driving stock prices. In November, when price volatility increased, earnings had a greater impact than valuation. While the price-to-earnings ratio (PER), which tends to move inversely with rising market interest rates, declined, upward revisions in earnings per share (EPS) offset this effect and helped limit the market's decline.

The 12-month forward EPS, which reflects the momentum of corporate earnings growth, continues to be revised upward. Its rate of increase is particularly steep compared to the 12-month trailing EPS. Notably, as earnings forecasts for the first quarter of next year rise rapidly compared to the fourth quarter of this year, the outlook for 12-month forward EPS is strengthening. Kim Daejun, a researcher at Korea Investment & Securities, commented, "Even if the market wavers, earnings now provide a solid support."

He also emphasized the need to review earnings forecasts by sector when constructing portfolios. Since current stock prices already reflect next year's earnings to some extent, it is important to check first-quarter results for next year as well. Upward earnings revisions are currently being seen in IT sectors such as semiconductors and hardware, as well as in energy, utilities, and holding companies.

For year-end market strategies, sectors where earnings forecasts and stock price trends are aligned are likely to outperform, as these sectors tend to lead the market. Kim noted, "Based on experience, even during periods of high volatility, the sectors driving the overall market flow are best at defending returns," adding, "From this perspective, IT should be an essential part of any portfolio, and it is also advisable to pay attention to utilities, banks, and insurance companies with favorable earnings outlooks."