🚨 US Monetary Policy Waves Will Shake 2026 Markets
Today Korean Economic News for Beginners | 2025.11.23
0️⃣ Rate Cut Expectations Ease and Overvaluation Concerns
📌 US Rate Hold Possibility Grows as Global Market Uncertainty Increases
💬 As expectations for US Federal Reserve interest rate cuts ease, uncertainty is growing in global stock markets for the first half of 2026. Markets expect the Fed will not rush to cut rates due to concerns about inflation rising again, and this is weighing on stock markets that have risen on expectations of rate cuts. In particular, US markets are facing overvaluation concerns with the S&P 500 index's PER reaching 24.5 times and NASDAQ at 34.4 times. Meanwhile, Korean stock markets are seen to have limited bubble risk, maintaining relatively low valuations with KOSPI PER at 10.7 times and PBR at 0.88 times. Experts predict that "US markets that have shown strength for three consecutive years may experience short-term corrections, which will also affect Korean and other global markets."
1️⃣ Easy Understanding
These days, people are talking a lot about how global stock markets, especially the US stock market, are ready to "take a breather." The reason is that the US central bank, the Federal Reserve (Fed), is now less likely to lower interest rates anytime soon.
Let's first understand the relationship between interest rates and stock markets. When the central bank lowers interest rates, it becomes easier to borrow money. Companies can get loans at cheaper interest rates to expand their business, and individuals can borrow money to buy houses or increase spending. When money flows freely into the market like this, the economy becomes active, companies' performance improves, and stock prices rise.
What happens when interest rates stay high or rate cuts are delayed? Companies reduce investment due to loan interest burdens, and individuals also hold back on spending. Moreover, when bank deposit rates are high, more people think "it's better to put money in safe deposits than risky stocks." When this happens, money that was flowing into the stock market decreases, putting brakes on stock price increases.
Looking at the current situation, there was widespread market expectation that the Fed would start lowering rates from late 2024. In fact, the Fed did cut rates several times in the second half of 2024. Thanks to these expectations, US markets showed strength for three consecutive years and kept rising.
But recently, things have changed. US inflation is stabilizing more slowly than expected, and some indicators even show signs of rising again. Fed Chair Jerome Powell and other monetary policy officials are showing a cautious attitude toward rate cuts, saying "it's still hard to say we've completely tamed inflation."
Let me give you an example. Mr. A is investing in stocks. If bank deposit rates are 2% per year, he thinks "I can only earn 2% from deposits, so I should aim for higher returns with stocks." But if bank rates rise to 5%, he might think "stocks are risky, but I can safely earn 5% at the bank. I should sell stocks and move to deposits." This is exactly the situation the market is facing now.
There's an even more important issue here: "valuation." Valuation is the concept of evaluating whether stock prices are appropriate or too expensive compared to a company's actual value. The most commonly used indicators are PER (Price-to-Earnings Ratio) and PBR (Price-to-Book Ratio).
PER is the stock price divided by earnings per share. Simply put, it shows "how many times higher is the stock price compared to what the company is currently earning?" For example, if Samsung Electronics stock is 60,000 won and earnings per share is 6,000 won, the PER is 10 times. This means Samsung Electronics stock is trading at 10 times what it earns in a year.
PBR is the stock price divided by book value per share. It's an indicator that shows "how many times is the stock price compared to the company's assets?" If PBR is 1, it means the stock price equals the company's asset value. Below 1 is considered undervalued, above 1 is overvalued.
Currently, the US S&P 500 index has a PER of 24.5 times. This means stocks are trading at 24.5 times what companies earn in a year. Technology-focused NASDAQ is even higher at 34.4 times. Historically, this level is quite high.
In contrast, Korea's KOSPI has a PER of 10.7 times and PBR of 0.88 times. Much lower than the US. This means Korean companies are relatively undervalued, but it also means investors don't see high growth potential in Korean companies.
Why does this difference exist? US companies, especially big tech firms, are at the forefront of the artificial intelligence (AI) revolution. Companies like NVIDIA, Microsoft, and Google are priced high because of expectations that they'll make huge profits from AI technology in the future. On the other hand, Korean companies are seen as lacking such innovative growth stories.
The problem is that when valuations get too high, it becomes dangerous. If stock prices are too high compared to companies' actual performance or asset values, they can shake greatly even with small bad news. It's like a balloon floating too high in the air—it shakes a lot even with a little wind.
Historically, after US markets showed strength for three consecutive years, corrections often followed. 1999 and 2021 were like that. In 1999, the dot-com bubble burst, and in 2021, markets underwent major corrections due to inflation and rate hikes. Now we're in a state of three consecutive years of gains in 2022, 2023, and 2024.
Of course, there's no rule that says "if it went up for three years, it must fall next year." But we can't ignore the lessons of history. Especially when valuations are high and rate cut expectations have weakened.
What about Korean stock markets? Korean markets have relatively less bubble concern due to low valuations. But the problem is that Korean markets are greatly influenced by US markets. When US markets fall significantly, Korean markets often fall together. This is called the "synchronization phenomenon."
Why is that? First, when foreign investors sense risk, they tend to sell emerging market stocks first. Korea is classified as a developed country by economic size, but is still often classified as an emerging market in forex markets. Second, many Korean companies are export companies, so they're sensitive to the global economy. When the US economy weakens, Korean companies' exports decrease and performance deteriorates.
In the end, the market now faces two risk factors: "weakening rate cut expectations" and "high valuations." If you're an investor, this is a time when you need a cautious approach rather than excessive optimism, recognizing this uncertainty.
2️⃣ Economic Terms
📕 Price-to-Earnings Ratio (PER)
PER is the ratio of stock price divided by earnings per share, showing the stock price level compared to company profitability.
- A high PER means the stock price is highly valued compared to what the company earns.
- Generally, PER above 20 times is considered overvalued and below 10 times is undervalued, but it varies by industry and growth potential.
- The current US S&P 500 PER is 24.5 times, higher than the historical average of 15-18 times.
📕 Price-to-Book Ratio (PBR)
PBR is the ratio of stock price divided by book value per share, showing the stock price level compared to company asset value.
- If PBR is below 1, it means the stock price is trading below the company's asset value.
- Korea's KOSPI PBR is 0.88 times, below 1, indicating an undervalued state.
- However, low PBR doesn't always mean an investment opportunity; it could also signal lack of growth potential.
📕 Base Interest Rate
The base interest rate is the basic rate the central bank applies to commercial banks, determining the overall interest rate level in the economy.
- When the base rate is high, loan interest rises, discouraging investment and consumption by companies and households.
- Conversely, when the base rate falls, it becomes easier to borrow money, activating economic activity.
- The Fed is not rushing rate cuts due to inflation concerns, which is weighing on stock markets.
📕 Valuation
Valuation is the concept of evaluating whether stock prices are appropriate compared to a company's actual value.
- Valuation is measured through various indicators like PER and PBR.
- High valuation (overvaluation) means greater risk of sharp price drops; low valuation (undervaluation) suggests upside potential.
- US markets are currently considered overvalued while Korean markets are considered undervalued.
3️⃣ Principles and Economic Outlook
✅ Correlation Between Overvaluation and Correction Risk
When valuations become too high, markets can shake greatly even with small shocks.
First, historically, corrections followed high valuation periods. During the 1999 dot-com bubble, NASDAQ's PER exceeded 100 times. Stock prices soared on expectations that internet companies would make huge profits in the future, but in reality most companies didn't make profits and the bubble eventually burst. In 2021, markets surged due to liquidity and low interest rates after COVID-19, but underwent major corrections with rate hikes in 2022. The current US market PER of 24.5 times isn't that extreme, but it's considerably higher than the historical average of 15-18 times.
Second, in overvalued states, stock prices plunge if earnings don't meet expectations. High stock prices mean investors have very high expectations for companies' future performance. If earnings announcements show numbers even slightly below expectations, disappointed selling can pour in and stock prices can crash. Especially for AI-related big tech companies, expectations that they'll make huge AI profits in coming years are reflected in stock prices, but if AI monetization doesn't happen as fast as expected, major corrections could come.
Third, risk doubles when liquidity reduction and overvaluation overlap. The biggest driver of market gains in recent years has been abundant liquidity from low interest rates. But if rate cuts are delayed or stopped, less money flows into markets. In this situation, already high stock prices are hard to sustain. Like rocks appearing as water recedes, overvalued stocks' true nature is revealed when liquidity decreases.
In overvalued markets, investors must approach more cautiously and always keep in mind the possibility of short-term corrections.
✅ Monetary Policy Continuity and Market Expectations
Central bank monetary policy tends to continue in one direction once set for a certain period.
First, Fed policy changes are gradual. Central banks avoid sudden policy changes to prevent shocking the market. When the Fed raised rates from 2022 to 2023, it gradually increased by 0.25-0.5 percentage points at a time. Similarly, when lowering rates, it does so slowly. The problem is that markets expected "the Fed will cut rates quickly and significantly," but the possibility of that not happening has grown. This gap between expectations and reality can lead to stock price corrections.
Second, reinflation risk constrains rate cuts. If the Fed cuts rates too quickly, the economy could overheat again and prices could rise. Especially since the US labor market is still solid and there's wage increase pressure, the Fed has no choice but to be careful. After cutting rates several times in the second half of 2024, Fed officials are signaling "we need to go slowly now." Markets are taking this as a "hawkish turn."
Third, rate policy changes have chain effects on global markets. When US rates stay high, the dollar tends to strengthen and emerging market currencies tend to weaken. The Korean won could also face depreciation pressure, which could be a factor causing foreign investors to sell Korean stocks and leave. Also, when US rates are high, investors worldwide move money to safe US assets, causing capital to flow out of emerging markets like Korea.
Since monetary policy direction changes greatly affect markets, investors must closely watch Fed policy signals.
✅ Coexistence of Long-term Bull Markets and Short-term Corrections
Just because it's a bull market doesn't mean it only goes up; corrections in between are inevitable.
First, corrections are a healthy process of bull markets. If stock prices rise too quickly, it's a sign of overheating, and through appropriate corrections, markets catch their breath and prepare for the next rise. The issue is the depth and duration of corrections. A 10-15% correction can be seen as a "normal correction," but a drop of more than 20% is seen as entering a "bear market." Historically, corrections of around 10% during bull markets have been common.
Second, correction possibilities increase after three consecutive years of gains. Statistically, after US markets rise for three consecutive years, the probability of continuing to rise in the fourth year is about 60%. In other words, 40% see corrections. After three consecutive years of gains in 2022, 2023, and 2024, we can't assume it will keep rising in 2026. Especially in an overvalued state, correction probability is higher.
Third, individual investors need portfolio management prepared for corrections. Many investors suffer losses even knowing corrections will come because of excessive leverage (investing with borrowed money) or concentrated investment. If you put all your money in one or two stocks and even borrow money to invest, even a 10-20% correction can cause big losses or forced liquidation. On the other hand, if you diversify appropriately and invest with spare funds, you can endure corrections and even use them as opportunities to buy more at cheaper prices.
Even if the bull market continues long-term, short-term corrections can come anytime, so it's important to maintain a "sustainable position."
4️⃣ In Conclusion
Changes in US monetary policy are emerging as a key variable for global market trends in 2026. As Fed rate cut expectations weaken, the liquidity-driven market rally may face brakes.
The overvalued state of US markets is particularly concerning. S&P 500 PER of 24.5 times and NASDAQ of 34.4 times are historically high levels, and corrections have followed at similar valuations in the past. After three consecutive years of gains and entering the fourth year, short-term correction possibilities cannot be ruled out.
On the other hand, Korean markets are in a relatively safe situation. KOSPI PER of 10.7 times and PBR of 0.88 times are far from bubble territory. However, since Korean markets are greatly influenced by US markets, Korea could also decline together if US markets correct. Foreign capital outflows and exchange rate volatility are also risks to consider.
So how should investors respond? First, beware of excessive optimism. Vague expectations that "it will keep rising" are dangerous. Second, review your portfolio and adjust risk. Reduce leverage, and if you have excessively concentrated stocks, diversify. Third, maintain appropriate cash holdings. If corrections come, that could actually be a buying opportunity, so holding some cash is advantageous.
What's important is not being overly affected by short-term fluctuations. Just because corrections come doesn't mean you need to sell all stocks. If it's a good company long-term, you can actually use correction periods as buying opportunities. Conversely, for overvalued stocks or those with weak fundamentals, it's wise to clear them before corrections.
In the end, 2026 markets will be a "period where opportunities and risks coexist." Understanding monetary policy changes, awareness of valuations, and risk management capabilities will determine investment performance. This is a time when cautious approaches are needed rather than excessive greed.
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