Santa Claus rally draws attention as both upside, downside factors weigh on market

An electronic trading board at Hana Bank headquarters in central Seoul shows the benchmark KOSPI closing at 3,994.93 points, Tuesday, up 1.9 percent from the previous session. Yonhap

The Korean stock market is drawing attention over whether it will ride a "Santa Claus" rally, a seasonal year-end rise in equities, with both upside and downside factors weighing on the market, analysts said Tuesday.

As for upside development, some analysts say the U.S. Federal Reserve’s highly anticipated rate cut on Dec. 10 (local time) and gains in artificial intelligence (AI) tech stocks are expected to support the Seoul market through Christmas and into the first week of next year.

Planned domestic policy measures are also likely to bolster market sentiment, including a proposed lower tax rate on stock-derived dividend income, mandatory share buybacks and a government-backed initiative to stimulate the secondary Kosdaq bourse.

Accordingly, optimists suggested that the benchmark KOSPI may reach the 4,700-point level, compared to its close at 3,994.93 points, Tuesday, up 1.9 percent from a day earlier.

On the downside, some experts noted that these domestic measures may be insufficient to drive a broad rally, while slower growth in stock prices relative to rising earnings per share (EPS) of benchmark KOSPI-listed companies could also limit further upside.

They suggested that the KOSPI will end the year somewhere between 4,100 points and 4,200 points.

“This year has been one of the strongest bull markets on record, and as upward momentum tends to remain largely stable through the end of the year, likelihood of a Santa Claus rally is high,” Byun Joon-ho, a researcher at IBK Investment & Securities, said.

He pointed to the KOSPI’s 63.6 percent gain from January to November, marking the steepest pace of increase among the main indices of G20 nations.

Accordingly, the KOSPI, after lingering in the 2,000-point range for years, surpassed the 3,000-point milestone in June and the 4,000-point mark in October.

Hana Securities analyst Lee Jae-man said the Fed’s anticipated interest rate cut of 25 basis points to 3.75-4 percent on Dec. 10 could “prompt investors to seek better returns outside the U.S. interest rate market.”

“The Korean market could be a viable option, given its rapid increase,” Lee said.

Lee Eun-taek, head of research at KB Securities, noted that Google’s latest AI model, Gemini 3.0 Pro, “has reaffirmed growth prospects for AI tech stocks in the U.S., and this trend is likely to carry over into the year-end Korean market.”

The analyst went on to outline planned policies that the government is pushing to implement in consultation with the ruling Democratic Party of Korea.

These include setting the maximum tax rate on returns from stock dividends at 25 percent, down from the initially proposed 35 percent, beginning in 2026.

The government also aims to encourage listed companies to buy back more treasury shares as part of a strategy intended to enhance investor returns.

In addition, it is considering rolling out tailored measures to boost the Kosdaq, which grew 36 percent from January to November, compared with 63.6 percent growth in the KOSPI.

Many of the measures, however, fall short of fully addressing retail investors’ demands, according to Daishin Securities analyst Jung Hae-chang.

“For instance, many retail investors believe that the maximum tax rate on stock dividends should be set lower than 25 percent,” he said. “This raises doubts about the likelihood of a Santa Claus rally this year.”

Roh Dong-gil, an analyst at Shinhan Securities, also remained skeptical.

He noted that although the EPS of KOSPI-listed companies has surged 34.2 percent compared with the beginning of the year, the KOSPI’s price-to-earnings ratio has been trending lower.

“This phenomenon occurs when there is insufficient confidence that earnings will improve further, often leading to a lackluster market,” he said.