An analysis from the securities industry on the 15th said profit concentration within KOSPI's semiconductor sector is deepening. Looking at past cases, it also noted that share prices generally react before actual profits, adding that prices respond more sensitively to changes in the speed of profit increases than to the absolute level of profits.
According to Hyundai Motor Securities, the semiconductor sector accounts for about 64% of KOSPI's total 12-month forward operating profit, the highest level on record. During the 2018 supercycle, the semiconductor share of KOSPI's total 12-month forward operating profit was about 40%.
Researcher Cho Chang-min at Hyundai Motor Securities said, "On an annual profit basis as well, of the estimated 750 trillion won in total KOSPI operating profit this year, semiconductors account for about 500 trillion won," adding, "The first-quarter profit outlook has been revised up 66.1% from a year earlier, but excluding semiconductors, sector profit outlooks have instead been revised down 3.3%."
In other words, a large portion of the overall profit upgrades is being driven by semiconductors.
Cho explained that, looking at past cases, stock prices generally react before actual profits. During the 2018 semiconductor supercycle, the share prices of Samsung Electronics and SK hynix also formed their peaks ahead of the profit peak.
Cho analyzed, "The important point is that share prices reacted more sensitively to changes in the speed of earnings upgrades than to the absolute level of profits," adding, "In fact, even when profits continue to increase, once the speed of upgrades starts to slow, we see the relative strength of leading stocks weaken first."
This means that even if profits are rising, a slowdown in the pace of upgrades can lead to weakening momentum for leading stocks.
However, it projected that concerns about a peak-out in the semiconductor sector are limited for now, because the pace of upgrades to semiconductor profit forecasts is likely to steepen again through the first-quarter earnings season.
Cho said, "A key variable to watch going forward is whether the pace of upgrades to semiconductor profits strengthens again," adding, "If the slope of upgrades to semiconductor profits is maintained or steepens again, a rally led by market leaders is also likely to continue for the time being."
But if the pace of semiconductor earnings upgrades starts to slow, Cho advised it will be necessary then to focus on sectors where the earnings cycle has already bottomed and is improving.
Cho explained, "In the 2018 case as well, as semiconductor leadership weakened, the market was seen reacting more quickly to sectors showing preemptive earnings improvement."
He added that, as of now, the recovery in automobiles and machinery stands out, and that energy, software, transportation, and communication services are also showing improvement after passing the bottom of their earnings cycles.