We expect the KOSPI to trade with a neutral-to-positive bias within a 6,500-7,700pt range in October. The lower bound corresponds to 5.3x 12-month-forward P/E, or ?2σ, versus the current 5.8x; the upper bound corresponds to 6.3x, or +1σ. The market has priced in inflation, monetary tightening and high interest rate risks to an extreme degree, while broadly undervaluing the outlook for the domestic and global AI and semiconductor industries, as well as their share prices, multiples and investor flows. Three developments could help these risks peak in late October or early November: 1) a rate hold at the October 29 FOMC meeting; 2) an all-out effort by the US Treasury to stabilize long-term yields, including a $6bn buyback and purchases of long-term bonds through the Treasury General Account (TGA); and 3) a potential easing of uncertainty surrounding Trump’s politics, policies and geopolitical actions in the 20 trading days before the November 3 midterm elections. A neutral-to-positive 3Q earnings season, led by Samsung Electronics’ entry into an era of W100tn in quarterly OP, should temper pessimism about AI and semiconductors and support a gradual recovery in Korean equities from their extreme rock-bottom levels. Samsung Electronics is scheduled to release its preliminary 3Q results on October 8.

We expect the rise in market yields to seek a peak during October, despite expectations of another Fed rate hike in December. The market currently prices in four hikes totaling 100bp (one in October and three more in January, March and September 2027), taking the terminal rate to 4.75-5.00%. This represents a most/long-term hawkish scenario. In our view, the Fed is more likely to deliver just one or two additional hikes, a less/short-term hawkish outcome. Our reasoning rests on: 1) the IMF’s projection that the US GDP gap, which is closely linked to changes in the Fed’s funds rate, will turn negative from 2026; 2) the unusual nature of current inflation, driven by a temporary, Trump-related cost-push shock to goods and energy rather than sustained demand-pull pressure; 3) qualitative and quantitative deterioration in employment and falling labor costs, which point to disinflation in core and services prices; 4) scope for a sustained decline in shelter inflation, which accounts for roughly 40% of core inflation; and 5) worsening funding strains and credit tightening for companies and households. These are the reasons we see scope for market yields to peak around late October or early November, accompanied by a shift in bond-market flows as the bond vigilantes’ short positions are squeezed.

As of September 25, the US 10-year Treasury yield of 5.16% comprises a core real yield of 1.60% inflation expectations of 2.83%, and a term premium of 0.73%. While nominal rates above 5% sparked macro/financial market taper tantrums and aggressive skepticism over mid- to long-term AI/semiconductor capex supercycle, the core real yield that functions as the actual equity discount rate in investment decisions remains well contained around its historical average. The Kevin Warsh-led Fed’s pivot toward active inflation fighting and the likelihood of Trump shifting focus from foreign affairs to domestic policy ahead of midterms (easing Middle East geopolitical risk) will likely help rein in inflation expectations. Moreover, forceful measures by Scott Bessent’s Treasury for downward stabilization of long-term rates will likely positively contribute to compressing the rigid term premium.

For market investors that face performance pressure, portfolio strategies will likely bifurcate into screening for safe haven alternatives insulated from rate risk, and concentrating on 3Q26 earnings surprise candidates. High-quality earnings names represent the most proven safe haven during a phase of high interest rate risk and extreme rate volatility. Until the perception gap between the market and the Fed narrows, bear-flattening rate environment seems inevitable for the near term. Positioning into investment alternatives that have historically outperformed the market during bear-flattening interest rate environments, supported by unmatched earnings momentum and stable pricing power will likely help navigate uncertainties. By cross-referencing recent coefficients of variation in EPS estimates and earnings consensus revisions, we can pre-screen 3Q26 earnings surprise and turnaround candidates. Sectors that align with this context are investment value chain leaders including semiconductor, IT appliances, shipbuilding, machinery, and construction. Expanding into individual stocks with consensus that satisfy these criteria results in Samsung Electronics, SK Hynix, Samsung Electro-Mechanics, Hanwha Aerospace, HD Hyundai Electric, Daeduck Electronics, Tes, ISC and TLB.

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