Semiconductor Outlook Optimistic Despite Rate Hikes

With the U.S. economic recovery and risk-on sentiment at work, the U.S. stock market hit record highs, contrary to the conventional wisdom that stocks fall.

The U.S. stock market instead hit record highs, demonstrating the market's adaptability to the new rate environment, which was driven by expectations for a U.S. economic recovery and risk-on sentiment.

Looking at a total of 20 rate hike cases since the 1970s, there were 17 hikes in 2004, while 1997 and 1982 saw only 1 hike each.

In the past, 2004 had 17 hikes, while 1997 and 1982 were unusual cases where rates were frozen after just 1 hike. This adds to doubts about the market's expectation that the Fed will hike once and then hold.

Market participants who expressed doubts during former Chair Powell's tenure are raising their expectations as they witness Chair Kevinner's confident approach. Since Chair Kevinner took office, the market consensus has been shifting rapidly from distrust to trust. After Chair Kevinner took office, the market consensus, which had worried about a lack of strategy, has recently been turning positive quickly.

This is because the market is responding positively to Chair Kevinner's confidence and charisma compared with former Chair Powell, and the market's calm after the rate hike is leading to the formation of trust.

If the 10-year Treasury yield stays below 5%, concerns that it will hold the market back are expected to ease. This level has become more than a simple psychological resistance line; it has become a gauge for confirming the market's tolerance for the new rate environment. If rates stay below 5%, it is interpreted as the result of a learning effect showing that high rates do not hold the market back.

The likelihood has increased that the market will show a stable trend at rate levels of 5% or below.

An analysis suggests that if Big Tech and hyperscaler investment continues, the economy can comfortably handle a high-rate environment in the 5% range.

If Big Tech and hyperscalers' AI infrastructure investment ensures continuity and sustainability, the U.S. economy is expected to comfortably handle the 5% rate level and continue its growth.

Currently, the U.S. 10-year Treasury yield is in the 5% range while China's is in the 2% range, creating an unprecedented rate gap.

In the U.S., rates are rising due to a shortage of long-term investment funds, while in China rates are falling due to a lack of investment destinations despite a massive trade surplus.

Former President Donald Trump may need Treasury yields to fall before the election and could demand that China slow the pace of selling U.S. Treasuries. China, too, could gain time to secure long-term investment destinations, raising the possibility of a give-and-take between the two countries.

With pressure from U.S. allies hindering the growth of China's key industries, Korea's two memory makers are reaping indirect benefits.

However, China's DRAM market share is rising rapidly from 4-5% a year ago to the 10% range now, and there are concerns that China's ChangXin Memory and others could enter the HBM market and that the U.S.-China talks could include remarks opening a path for Chinese memory.

China's ChangXin Memory has begun developing HBM technology, but it is assessed as still far from commercialization.

Memory semiconductors are regarded as a core security asset for the U.S. to maintain AI hegemony, so the likelihood that the U.S. will provide a trigger to give China a technological advantage is extremely low, making a comprehensive technology exchange agreement unlikely.

In U.S. intellectual circles, the 'AI control' theory that AI could bring misfortune to humanity is being raised, and calls to slow AI down are emerging.

In the past, it was common for the private sector to demand deregulation and the government to push for regulation, but now a reversal is appearing in the U.S. where the private sector advocates AI regulation while the government regards AI as the only field where it can overwhelm China and pushes for growth.

AI regulation and slowing down will act like car brakes and ultimately accelerate industry growth.

This view of slowing AI is assessed as likely to promote the development of advanced AI technologies such as Astra versions 3 and 4 and increase the enormous demand for memory semiconductors needed for them, acting as a positive accelerant for Korean companies.

Despite concerns over lower profits due to a stronger won, earnings are expected to improve compared with the previous quarter, which will be an important indicator for meeting market expectations.

Along with the earnings announcement, whether shareholder return policy will have continuity rather than being one-off is also a key market concern, and it is expected to serve as a gauge of the company's willingness to enhance long-term value.

In the fourth quarter, as macro pressure eases, strong and robust earnings are expected to drive the market again.

It is significant that investment titans such as Druckenmiller visited Korean companies (Doosan, Samsung Electronics, SK hynix).

While Jensen Huang focuses on chips, Bill Gates and Druckenmiller are investing in infrastructure, indicating that the AI industry cycle will lengthen.

If earnings in the third and fourth quarters support this, it is expected to end the long-standing cycle controversy and establish a status beyond a Korean company.

If it maintains earnings at or above the current level in the third and fourth quarters, Samsung Electronics will level up once again from a Korean company to a global company, and the semiconductor cycle controversy may also come to an end to some extent.

Korea's GDP deflator rose more than 20% year on year, showing inflationary pressure along with the other side of the GDI improvement reflected in higher export unit prices (such as semiconductors).

It is now time to prepare not only for U.S. rate risk but also for the possibility of a Bank of Korea rate hike in October.

The central bank (Bank of Korea) carries out tightening policy to respond to inflation, while the government carries out fiscal expansion policy to stimulate the economy according to their respective roles, which is expected to contribute to containing enormous inflation concerns.

Investors should use the Chuseok holiday as a temporary correction period within a bull market to catch their breath with a long-term perspective.

It is hoped that the Korean market will move away from short-term trading and create an environment where long-term investment can win by gradually accumulating stocks of the era, and it is hoped that September 2026 will be the starting point for such long-term investment.