Impact of U.S. Midterm Elections on KOSPI: Analysts Favor 'W' Recovery

The Democratic Party's decisive victory in the U.S. midterm elections, dubbed a 'blue tsunami,' is drawing attention to its potential impact on the domestic stock market. With one of the two major uncertainties—concerns over artificial intelligence (AI) investments—now alleviated, analysts are divided between optimism for a rebound and skepticism about the AI sector's stability.

According to the securities industry on November 4, the shift in congressional power following the midterm elections is expected to bring various policy changes in trade, AI, China relations, energy, healthcare, and security. Experts advise that understanding the investment direction in AI, defense, and energy infrastructure within the broader context of U.S.-China relations is crucial for identifying long-term growth sectors.

Analysis from five major securities research centers indicates a prevailing opinion of a 'W' recovery, suggesting limited rebounds rather than a continuous downward trend. Key sectors of interest include solar energy, energy storage systems (ESS), and secondary batteries, which are anticipated to benefit from the Democratic victory, alongside AI, semiconductors, and defense stocks that are central to U.S.-China tensions.

Yang Ji-hwan, head of Daishin Securities Research Center, noted, "Historically, the KOSPI has shown an upward trend following the midterm elections in the U.S., albeit with a time lag compared to the New York Stock Exchange. Given the clear disapproval of former President Trump's policies, we may see short-term adjustments across the AI value chain, while renewable energy stocks could attract market interest due to the Democratic advantage."

Yoon Chang-yong, head of Shinhan Investment Corp. Research Center, stated, "With the Democratic victory becoming more certain, the KOSPI is experiencing increased downward volatility, particularly in semiconductors, compounded by concerns over AI capital constraints and delays in data center approvals. However, following the elections, we expect a strong recovery in sectors like secondary batteries, green energy, and ESS, leading to a gradual reduction in KOSPI volatility."

Shin Jung-ho, head of LS Securities Research Center, remarked, "Even if the Democrats control both chambers of Congress, the overarching direction of AI policies that counter China’s interests is unlikely to change significantly. The Democratic stance on AI and data center regulations may soften through market engagement, and discussions on easing financial regulations and policy support could emerge post-election, fostering a rebound in indices."

Hwang Seung-taek, head of Hana Securities Research Center, expressed, "While the resolution of uncertainties and enhanced congressional checks create both upside and downside risks, the KOSPI will need time to establish multiple support levels centered around AI stocks. Notably, sectors benefiting from the Democratic agenda, such as secondary batteries and AI, semiconductors, are prominent. Although there are concerns about growth slowdowns, the KOSPI has undergone sufficient price adjustments, suggesting a strong upward potential post-election, supported by stability in interest rates and inflation."

Some analysts caution that the market has already priced in expectations of uncertainty resolution, advocating for a cautious approach. Lee Jong-hyung, head of Kiwoom Securities Center, stated, "The market tends to avoid uncertainty, so regardless of the election outcome, there is a high likelihood of a rally simply due to the conclusion of the election. However, we must be wary of short-term volatility, as the resolution of AI industry concerns and geopolitical risks may cause further fluctuations."

Consensus among analysts suggests that the KOSPI will range between 4800 and 8000 by the end of this year and into the first half of next year. Yang noted, "If the Democrats control both chambers, expectations for early war resolutions could stabilize oil and commodity prices. As inflation concerns ease, we may see a downward stabilization in U.S. interest rates, which would reduce downward pressure on the KOSPI."

Shin added, "Long-term benefits are anticipated for sectors like renewable energy, ESS, and secondary batteries. We expect these sectors to push the KOSPI to the 6500 level by year-end and reach 7000-7500 in the first half of next year."

Lee concluded, "By the first half of 2027, we expect continued high volatility as the market reassesses burdens from long-term U.S. interest rates, the expansion of AI investments, and concerns over declining semiconductor profit growth. However, starting in the second quarter of next year, macroeconomic uncertainties are likely to stabilize, and the free cash flow of hyperscalers is expected to surpass its low point, alleviating valuation discount factors for the KOSPI."

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