The KOSPI broke through the 3,400 level for the first time ever, extending its record-setting run. It has risen 42% so far this year, the highest gain among major markets. Even during September's seasonally weak period, the index has climbed for 10 straight trading days.
Behind the strength in the domestic market is the U.S. monetary policy easing stance. Expectations for U.S. rate cuts and the resulting liquidity outlook have drawn foreign investors into the domestic market. The government's decision to keep the current threshold for defining large shareholders subject to capital gains tax on stocks also boosted sentiment.
However, because rate cuts are already being taken as a clear signal by the market, there are warnings that if the related catalyst disappears at the upcoming Federal Open Market Committee (FOMC), stocks could lose steam. Andrew Tyler, head of global market intelligence at JPMorgan Chase, warned that if the Federal Reserve cuts rates as the market expects, the market could turn weak in line with the long-standing advice to "sell the news."
In short, for the market to rise further, a new momentum is needed after rate cuts. The securities industry sees additional government market support measures as the most likely catalyst. At this month's regular National Assembly session, a third amendment to the Commercial Act, including mandatory cancellation of treasury shares, is expected to be discussed.
There is also talk of easing the top rate under the separate taxation of dividend income. If market-friendly measures materialize, the index's uptrend could continue. Han Ji-young, a Kiwoom Securities researcher, said institutional changes such as the Commercial Act amendment, including mandatory cancellation of treasury shares, could help improve the domestic market's return on equity.
Corporate earnings are another variable. As the rally so far has been led by a valuation re-rating, listed companies' actual performance needs to back it up, observers say. Due to tariff effects that have continued since last month, third-quarter (July–September) operating profit forecasts for 184 listed companies stand at 62.4 trillion won, down 1.37% from a month earlier.
Park Seung-jin, a Hana Securities researcher, said, "Since June, the domestic market has seen a larger impact from policy-driven valuation readjustments than from earnings improvements," adding, "For the uptrend in the domestic market to hold and for individual buying to emerge, earnings will need to support it."
The outcome of tariff negotiations with the United States will also determine whether the rally extends. The United States has demanded $250 billion in cash investment from Korea. That exceeds 80% of foreign exchange reserves and is effectively an impossible condition. The Korean government is said to have instead requested an unlimited currency swap.
Talks with the United States have shown no progress on key issues such as auto tariffs and visas for technical personnel. As a result, representative export stocks, including autos, have been left out of this rally, and shipbuilding and nuclear power have also been weak. If talks break down and itemized tariffs are set at 25%, the market is likely to be put in check.
In effect, the "honeymoon rally" since the launch of the new administration has entered its final phase, and some say tangible results from actual institutional changes now need to appear.
Jung Hae-chang, a DAISHIN SECURITIES researcher, said, "The future direction of stock prices will be determined by the application of the revised tax and commercial laws to actual law enforcement and legal effectiveness against unfair transaction, the visibility of corporate earnings following industrial policy, and diplomatic issues such as talks with the United States and North America," adding, "It is time to focus on tracking corporate results from actual institutional changes."