IBK Securities said volatility in the stock market could increase in the second half if the Iran crisis drags on and the high interest rate environment lasts longer than expected. It said rising oil prices are pushing up inflation and rates, and if high rates lead to an economic slowdown and weaker corporate earnings, the market's expectations premised on a recovery next year could also be shaken.
Byun Jun-ho, an analyst at IBK Securities, said in a report on the 20th that "there is a possibility that the burden on the second-half stock market will persist as domestic and external economic uncertainty in 2027 increases due to the prolonged Iran crisis."
Right after the Iran crisis erupted on Mar. in , the market largely expected the clash to end relatively quickly. But after the deadline for a U.S.-Iran memorandum of understanding (MOU) passed, disagreements over control of the Strait of Hormuz, compensation, and the nuclear program remained unresolved, reviving concerns about a prolonged standoff.
The problem is that Middle East instability is feeding through higher oil prices into rising interest rates. When oil prices climb, inflationary pressure increases and it can become harder for the Central Bank to ease monetary policy. Recently, a wave of large bond issuance and global tightening have overlapped, and U.S. rates have hardly fallen despite weak inflation and jobs data.
Byun said, "The fact that U.S. rates are rising without reflecting logical reasons for a decline can have a significantly negative impact on investor sentiment," adding, "If they clearly break above the pre-global financial crisis peak, we cannot rule out the possibility of a rate tantrum and panic selling."
If high rates persist, the concern is not limited to rates themselves. When high borrowing costs squeeze consumption and investment, it leads to an economic slowdown, which can in turn affect earnings outlooks for corporations. Byun said, "If the Iran crisis is not resolved immediately, concerns about a prolonged period of high rates will grow, and this can spur an economic issue beyond just a rate issue," adding, "An economic issue ultimately leads to an earnings risk."
In the past, surging oil prices due to war-related disruptions to crude supply have repeatedly been followed by slower global economic growth. After the Iran-Iraq war in 1980, the Gulf War in 1990, and the Russia-Ukraine war in 2022, global growth fell the following year after oil price spikes, and in some cases the weakness continued into the year after that.
The current market outlook is different. Based on Bloomberg consensus, global economic growth is expected to rise to 3.1% next year from 2.9% this year. The projection assumes productivity gains from expanded AI investment and a European recovery.
However, it said that if the Middle East crisis lasts longer than expected, hopes for a rebound next year could weaken. Byun said, "If the Iran crisis is prolonged, there is a high possibility that optimistic expectations for a rebound next year will retreat and growth forecasts will be revised down," adding, "As in past cases, there is also a chance that next year's global growth will be lower than this year's."
It is also a burden on the Korean stock market. Korea's economic growth rate is currently projected to fall to 2.3% next year from 3.3% this year. If the global outlook is also revised down, the domestic growth forecast could be cut further. In particular, the stock market in the second half tends to price in the next year's economy and earnings in advance, so the more next year's growth outlook wavers, the greater the volatility could become.
According to IBK Securities, in past cases where the following year's growth fell by 0.7 to 2 percentage points, the stock market declined in the second half in all six instances except 2004. However, it said that because the KOSPI has already undergone a sharp correction in the second half of this year, the room for further declines is not large compared with past cases.
Next week's Jackson Hole meeting and Nvidia's earnings announcement were also cited as variables that could set the market's direction. Byun said attention should be paid on the 27th to whether Chair Kevin Warsh of the Federal Reserve (Fed) in Jackson Hole will toughen hawkish messaging in light of inflationary pressures from the Middle East. For Nvidia's earnings due on the 26th, he said whether there is an earnings surprise and confidence in forward guidance will be key.