High Interest Rates: Only a Few Sectors with Strong Earnings Will Rise

Real interest rates reflect how long U.S. benchmark rates will be maintained, along with growth and inflation expectations. Term premiums indicate uncertainty about whether there will be sufficient demand when U.S. Treasury bonds are issued.

Compared to February of this year, real interest rates expanded from 3.5% to 4.2%, and term premiums from 0.5% to 1%. While the market can absorb interest rate hikes driven by growth expectations, an increase in term premiums due to supply-demand uncertainty acts as a negative factor.

Past periods of rising interest rates that significantly impacted the stock market are attributed to uncertainty factors, such as term premiums, driving the rate hikes.

Currently, the rise in real interest rates, reflecting growth expectations, accounts for a large portion of the overall rate increase, acting as a factor that helps the market withstand downward pressure.

In the early stages of interest rate hike cycles, a pattern has been observed where stock prices rise concurrently with increasing corporate profits due to expectations of economic growth.

The robustness of the U.S. economy is evident compared to the 1% growth rate in the previous quarter. The Fed's real-time prediction model, 'GDP Now,' projects a Q3 GDP growth rate of 5-5.2% annually.

This figure is a significant increase compared to the previous quarter's growth rate, which remained in the 1% range, serving as a key basis for supporting the robust U.S. economy.

If the U.S. 10-year Treasury yield maintains its current level of 5.2% or rises further, there is a possibility of pressure being exerted on the broader market.

To alleviate this situation, the Treasury and the Fed must address uncertainties in Treasury demand and seek market stabilization through verbal intervention or policy interventions. Currently, inflation concerns due to geopolitical risks are also being reflected in rising interest rates.

This polarization of earnings and stock prices is a major characteristic of the current market, and for the widespread adoption of the AI industry, broad-based profit generation or a decrease in interest rates is essential.

The rise of the S&P 500 index is driven by a few top companies, indicating a continued dominance by specific companies rather than a broad market rally.

The forward P/E of the S&P 500 was formed at a level of 19-20x. The difference between this index's expected return and the U.S. 10-year Treasury yield converged to zero, and to expand this spread, either earning growth or interest rate cuts must follow.

For this spread to widen, one of two conditions must be met: sustained growth in corporate earnings or a reduction in interest rates.

After a period of dominance led by semiconductor companies, the market's spread to broader sectors has slowed.

With the U.S. 10-year Treasury yield remaining at a high level, this market polarization is further intensifying, and the current market is being driven by a few companies that generate stable profits even in a high-interest-rate environment.

For profit-generating companies, primarily in the AI industry, to expand across the board, improving corporate loan conditions through U.S. government deregulation must come first. We can gauge the potential for investment sector expansion when the U.S. 10-year Treasury yield falls to 4.9% or 4.5%. The key is whether AI industry-centric profit-generating companies will increase across the board.

Such a drop in interest rates creates an environment where profit-generating companies, especially in the AI industry, can expand broadly, and improving corporate lending conditions through U.S. government deregulation is also necessary.

From August to October 2023, the U.S. 10-year Treasury yield reached 5%, leading to a stock market decline (S&P 500 index from 4,600 to 4,200).

Subsequently, Treasury Secretary Yellen announced a reduction in long-term bond issuance and an increase in short-term bond issuance, which caused interest rates to fall and drove the stock market's rebound. Resolving concerns about bond supply played a key role in the decline of long-term interest rates.

The Treasury's new bond issuance plan in early November is expected to show a reduction in supply, which should contribute to market stabilization.

The U.S. government is demonstrating its commitment to stabilizing the market through various demand-management policies, including increasing bond buybacks, raising the proportion of short-term bond issuance, and reducing long-term bond issuance.

Furthermore, there are efforts to secure new demand sources for Treasury bonds through measures such as U.S. bank regulatory reform and bond tokenization. The government is expected to stabilize the market by adjusting term premiums without hindering growth.

Most of the 22 surveyed countries recorded gains last week. Amid this trend, Taiwan and Korea showed high returns of 4-5%, driven by the strength of semiconductor-related stocks.

Across the global market, IT-related stocks showed a notable upward trend. In particular, technology stocks, including semiconductors, were seen driving this week's returns.

This is interpreted as a rebound after a sharp drop.

In contrast, the Taiwanese stock market has consistently maintained an upward trend, recording positive returns for the recent 1-day, 1-week, 1-month, and year-to-date periods, recovering from its correction phase. Despite being semiconductor-centric nations, there's a difference in the pace of market recovery.

If earnings growth continues in the future, there appears to be additional upside potential.

Korea's EPS (Earnings Per Share) growth rate increased by 91% compared to six months ago, but the rate of increase has slowed over the past month.

Taiwan has maintained a steady EPS growth rate over the past three months and one month, showing stable growth. This is attributed to the consensus in the Korean market regarding the peak of the memory cycle.

Autonomous driving and humanoid robot industries are considered key areas that will drive large-scale memory demand. The current slow growth of these industries is increasing uncertainty in the memory cycle, making it a time for related companies to adjust their pace. A full memory cycle rebound will only be possible when the growth rate of these industries catches up.

Currently, the growth of these front-end industries is slow, leading to uncertainty in the memory cycle.

If autonomous driving and humanoid robot industries grow significantly, there is a possibility that the memory cycle will also expand greatly.

Currently, the Korean stock market's valuation is assessed as very cheap, suggesting ample upside potential in the future.

Investors should guard against the fear that causes them to realize profits when the market rises and hesitate to invest when it falls. Investors must adopt an attitude of understanding the larger cycles.

It is crucial for long-term market outlooks to understand that the U.S. Federal Reserve and government have no intention of disrupting the AI industry's value chain.

The collapse of the dot-com bubble in 1999 was mainly caused by the government starting to collect taxes, cutting off funding. The current U.S. government is actively supporting the AI industry, even at the cost of fiscal deficits, which marks a difference from the past.

If the upward trend is blocked by interest rates, the sustainability of the 6,800 level is important, and while profit improvement centered on IT companies is positive, a concentrated market led by dominant stocks continues. If the 1st resistance zone of 7,300-7,400 is breached, the upside potential extends to 8,900, the upper Bollinger Band.

If the upward trend is blocked by interest rates, the sustainability of the 6,800 level is important, and while profit improvement centered on IT companies is positive, a concentrated market led by dominant stocks is expected to continue.