The domestic stock market is trying to rebound after a recent plunge, but an outlook said it will not be easy to reclaim the previous peak within the third quarter. With KOSPI margin debt still at a high level, volatility is likely to expand, and a range-bound market searching for direction is expected to continue through year-end.
Kim Jun-young, an iM Securities researcher, said in a report on the 20th, "Rather than reclaiming the previous peak within the third quarter, a phase of exploring a range-bound market is likely to continue through year-end."
Excessive leveraged investing was cited as the backdrop for the latest correction. Because buying on credit was strong in both the United States and Korea, a price correction was inevitable, the explanation said.
In particular, the KOSPI and KOSDAQ moved in different directions in the Korean market. As the KOSDAQ index fell, margin debt also decreased, and investors reduced their exposure, but on the KOSPI, margin debt hardly declined even as the index fell sharply. When the rebound was delayed, margin debt belatedly began to decrease.
Kim said, "With margin debt piled up, high volatility is likely to amplify market swings," adding, "If the index falls further, it is necessary to keep in mind the possibility of credit-driven selling."
However, the view is that it is difficult to see the current phase as a full-fledged bear market. Kim said, "Given the rising volatility, the current decline is similar to the adjustment after the war in March," adding, "It is difficult to say the market has entered a bear phase yet."
The securities industry is leaning toward the possibility that a range-bound market will continue for the time being. The long-term direction for the semiconductor cycle remains positive, but it will take time for the semiconductor cycle that led the prior rally to regain momentum, the explanation said.
Kim said, "I expect a range-bound market rather than a reclaiming of the previous peak," adding, "Both the dot-com bubble and the 2017 semiconductor cycle moved sideways for about six months after passing their peaks." He added, "Rather than dropping all at once, the index is likely to move sideways within a range and, through year-end, undergo a period of exploration to see whether it can break through 10,000 points."
Market attention is shifting to second-quarter results from U.S. big tech companies starting next week. However, this earnings season, the sustainability of investment is a more important variable than the sheer scale of investment, according to the analysis.
Kim said, "The key point in big tech earnings is not the size of capital expenditures (CAPEX)," emphasizing, "What the market wants to confirm this time is the performance that supports the expenditure and the willingness to continue spending."
He added, "If CAPEX increases, investment can eat into growth in operating cash flow," analyzing, "Whether share buybacks and dividends shrink, and whether companies begin to cover shortfalls with borrowing, will be the substantive issues ahead."
Although investment in artificial intelligence (AI) continues to expand, a view also emerged that it is now difficult to justify high valuations on growth potential alone. Because AI infrastructure is a capital-intensive industry that requires large-scale capital, the market has entered a phase where growth, investment efficiency, and profitability must all be verified together.
Kim said, "Debate over the cycle for memory ultimately leads to concerns about the profitability of big tech and frontier AI labs," explaining, "When memory prices are high, valuations for AI corporations are suppressed, and conversely, when AI company values rise, memory makers' valuations can feel pressure." He added, "Just as it is difficult for both the pick-and-shovel sellers and the miners to command high valuations at the same time, the market is searching for the right balance."