Can Semiconductors Be Okay Even If Interest Rates Rise? Focus on Big Tech Fundamentals

An analysis suggested that Kevin Warsh's remarks at the recent Jackson Hole meeting left room for hawkish interpretation. He hinted that the possibility of interest rate hikes cannot be ruled out until there is confidence that inflation has reached the 2% target. He also reiterated the principle that future interest rate policy decisions will depend on incoming data.

However, recently, sensitivity to each word from the Fed has relatively decreased. Instead, market volatility tends to increase as the market's interpretation of individual economic indicators expands each time they are released.

This week's labor data, to be released on September 4, has become very important. While the July labor data released in early August showed sluggishness, this September 4 data could significantly change the probability of interest rate hikes depending on the strength of the labor market. The current market consensus expects an employment increase of about 50,000 to 60,000, and if this figure comes out low again after July, market expectations for a rate hike are likely to subside somewhat.

JOLTs stands for 'Job Openings and Labor Turnover Survey,' and it tracks the number of job seekers that companies post before actual hiring. If job openings are high, future employment data is expected to be good; conversely, a decrease in job openings can be interpreted as a sign of a slowing labor market. However, this report has limitations as it shows trends in the private employment market, not government data.

When interpreting the JOLTs report, it's necessary to consider the number of job openings along with the number of unemployed people released by the Bureau of Labor Statistics. A decrease in job openings can be viewed positively as a sign of employment slowdown, but it's important that the number of unemployed people is also decreasing. A decrease in unemployed people can suggest a tight labor market, requiring a complex interpretation.

Currently, in the labor market, even though the number of job openings is decreasing, the number of unemployed people is decreasing more significantly. This suggests that the labor market, while not 'strong,' can be considered 'tight.' A tight labor market means that companies are struggling to secure personnel, which could lead to future wage increases and act as inflationary pressure.

The market is currently reacting sensitively to a series of economic indicators, including JOLTs data, employment reports, and CPI. The market direction is swaying more based on short-term data release results than on Fed Chair Powell's statements. This shows that the Fed's forward guidance influence has weakened compared to before, and the market is expected to react by checking each upcoming data point.

Assuming a robust US economy, AI investment acts as a key market driver. In this environment, big tech companies are actively issuing corporate bonds even at high interest rate levels to raise investment funds. As a result, an analysis suggests that the sensitivity of big tech stock prices to rising interest rates is not as significant as might be expected.

In contrast, Microsoft showed the lowest sensitivity, with its stock price moving only 0.3% for every 1% change in interest rates. This suggests that fundamental corporate factors may have a greater impact on stock prices than interest rate sensitivity, and that not all big tech companies react identically to interest rate changes.

This indicates that companies are actively raising investment funds. However, the key question now is whether such corporate bond issuance is sustainable and if there is a tipping point that the market can tolerate.

When big tech companies like Alphabet issue corporate bonds, there's typically demand four times the issuance size. This reflects the market's strong confidence in the companies' investment intentions and robust cash flows, even in a rising interest rate environment. Therefore, even if interest rates rise somewhat, the market's sensitivity to big tech companies can still be considered low.

If the anticipated Return On Invested Capital (ROIC) and free cash flow from AI data centers and GPU data centers are robust, interest rate risks may be limited. The market trusts and invests in the asset value of big tech companies based on these future cash flows and backlogs.

While sluggish employment data last month led to predictions that employment would be central to policy, the Fed stressed its commitment to its mandate if inflation isn't brought under control, indicating it still places high importance on inflation data.

Negative impacts on big tech companies are expected to be limited even if interest rate hikes proceed.

US 2-year and 10-year Treasury yields remain at similar levels to late July. Nevertheless, the stock prices of US big tech and semiconductor companies are all at higher levels compared to late July. This indicates that factors other than interest rates are having a greater impact on stock prices, even with similar interest rate levels. In contrast, the Korean stock market has shown a decline compared to late July at the same interest rate levels, indicating a difference.

The fundamentals of semiconductor companies like Samsung Electronics are assessed to have improved further since July. This is due to fundamental changes in the industry, such as the expectation that the supply shortage will persist until 2028. Therefore, the stock prices of semiconductor companies are analyzed to be more significantly influenced by these fundamental improvements than by interest rate fluctuations.

Even if interest rates rise, their sustainability still needs to be confirmed through individual data. Foreign investors are adequately reacting to the fundamental improvement of semiconductor companies, indicating that they place greater emphasis on intrinsic corporate value than on interest rate issues.

On a day when interest rates rose, Amazon's stock price increased by 4%. This was due to positive news related to Anthropic, in which Amazon has invested. Anthropic, a company developing the language model 'Claude,' legally resolved issues with Pentagon sanctions. As Amazon is Anthropic's largest strategic backer and ally, this positive news was reflected in its stock price. This case demonstrates that the market is more sensitive to fundamental issues like increased data center demand for companies than to macroeconomic factors like interest rates.