[Practical Investing] From AI Earnings to Middle East War... Year-End Market Factors in Focus

Big Tech Q3 earnings put the sustainability of AI investment to the test
Uncertainty also looms after the U.S. midterm elections
Whether Samsung Electronics and SK hynix deliver on shareholder returns is also in focus

Global stock markets, which have continued to rise amid the artificial intelligence (AI) boom, have reached a turning point ahead of year-end. As U.S. technology stocks undergo a correction and questions grow about the sustainability of AI investment, investors also face a growing number of factors to watch, including developments in the Middle East after the U.S. midterm elections and shareholder return policies at domestic semiconductor companies. With hopes for a year-end Santa rally intersecting with geopolitical uncertainty, analysts say investors should take a cautious approach and keep a close eye on major events.

Meta, Google, Microsoft and Amazon... Big Tech earnings in focus

Earnings reports from major U.S. Big Tech companies for the third quarter are now getting underway. Meta is set to report on October 21 (local time), followed in quick succession by Microsoft, Alphabet on October 28, and Amazon on October 29. The market is focused on whether massive AI capital expenditures are translating into actual profits.

From the start of this month through the previous day, the Philadelphia Semiconductor Index fell 11.8% on a closing-price basis, with volatility in AI-related stocks increasing. The recent correction in AI-related stocks is closely tied to the lofty expectations that had built up. Big Tech companies are pouring enormous sums into data centers and AI infrastructure, but it remains uncertain how quickly revenue and profit growth commensurate with the scale of that investment will materialize.

The key is balancing increased AI investment with profitability. If cloud revenue remains solid and the monetization of AI services becomes more evident, confidence in the investment boom could recover. On the other hand, analysts say market skepticism could deepen if massive capital expenditures lead to higher depreciation expenses and weaker cash flow. In particular, investment plans by U.S. Big Tech companies are directly tied to domestic semiconductor companies' demand for high-bandwidth memory (HBM), and are therefore expected to affect the domestic stock market as well.

U.S. midterm elections could be a turning point... Uncertainty may grow further

U.S. President Donald Trump

The U.S. midterm elections, scheduled for November 3, are also an important turning point. Historically, U.S. stocks have often strengthened from year-end into the following year as political uncertainty eased after midterm elections. This time, too, there are hopes that the elections could help stabilize the stock market and lead to a "Santa rally."

If the Democrats win a majority in either the House or the Senate, weakening President Donald Trump's ability to advance his policies, the market may focus on the possibility of stronger checks on tariffs and fiscal policy. However, a deepening congressional deadlock could create new uncertainty around budget negotiations and the implementation of major policies. In other words, a political lame duck period does not necessarily benefit the stock market. "The stock market's gains after midterm elections and the high returns seen under certain government configurations can serve as historical reference points. But when assessing the market's future direction, it is more important to focus on the economy, interest rates and corporate earnings than on political factors," said Kim Yeseul, a researcher at IBK Investment & Securities.

One risk to watch is the possibility that military conflict between the United States and Iran could escalate again after the midterm elections. President Trump has said the United States will not attack Iran before the midterms, but he has not ruled out further military action afterward. Negotiations between the United States and Iran remain deadlocked, and tensions over the Strait of Hormuz persist.

Another concern is that Russian energy export facilities are being targeted by Ukraine. If disruptions to oil supplies from Russia and the Middle East occur at the same time, global oil prices could surge again. High oil prices are bad news for a stock market dominated by growth stocks, as they stoke inflation concerns and could limit the Federal Reserve's room to cut interest rates. Conversely, progress in Middle East negotiations and increased supplies of Russian energy could ease pressure on oil prices. "The situation remains unchanged: technology stocks, including AI-related companies, are driving earnings growth in global markets. The question is when interest rate increases triggered by rising oil prices will stabilize," said Yang Ilwoo, a researcher at Samsung Securities. "Geopolitical factors are expected to be a turning point immediately after the U.S. midterm elections."

Samsung Electronics and SK hynix earnings are already priced in... Shareholder returns are key

The most direct factor affecting the domestic stock market is the shareholder return policies of Samsung Electronics and SK hynix. With their solid earnings growth already widely known, the market appears to be looking for additional good news.

Samsung Electronics previously put its remaining shareholder return resources at KRW 90 trillion to KRW 110 trillion. On October 29, alongside its finalized third-quarter earnings announcement, the company will hold a corporate briefing and is expected to have its board approve the previously announced cash dividend plan of KRW 30 trillion. Investors will be watching to see whether the company announces the amount and form of the remaining KRW 60 trillion to KRW 80 trillion in shareholder returns at the briefing. Cash dividends are seen as the most likely form of shareholder returns, but analysts say a share buyback followed by cancellation cannot be ruled out.

SK hynix previously approved the acquisition and cancellation of KRW 40 trillion worth of treasury shares and announced a plan to return at least 50% of its cumulative free cash flow from 2025 to 2027 to shareholders. The company is also expected to announce additional shareholder returns alongside its third-quarter earnings on October 28. The market expects the additional shareholder return resources to exceed KRW 30 trillion.

"The sharp decline in July was followed by a steep market rebound when Big Tech companies reported earnings at the end of that month. With Big Tech, Samsung Electronics and SK hynix all reporting earnings toward the end of this month, that period could become a turning point for the stock market this year," said Lee Kyungmin, a researcher at Daishin Securities. "Upward revisions to Big Tech capital expenditure plans and new shareholder return measures from Samsung Electronics and SK hynix could serve as upside triggers."

This content was produced with the assistance of AI translation services.