AI Cycle Remains Robust Amidst Rising Interest Rates

While the S&P 500 fell by 0.8% and the Nasdaq by 0.66%, the Russell 2000 index recorded a significant drop of 2.4%.

Department Head Yoo Dong-won explained that the sharp decline in the Russell 2000 reflects concerns about surging oil prices and subsequent interest rate hikes. Small and medium-sized stocks, which have high debt ratios, are vulnerable to interest rate increases, exacerbating the decline.

Goldman Sachs analyzed that even amidst rising interest rates, the 12-month forward P/E of the S&P 500 has fallen from 22x at the beginning of the year to 19x currently.

This means that the valuation burden has actually eased, making it difficult to unilaterally predict the stock market based solely on valuation, despite rising interest rates being a negative factor for the market.

Only 18% of S&P 500 component stocks are above their 20-day moving average, falling below the 20% threshold for an oversold zone.

A study of seven past instances where the AAII Bullish 20-week moving average surpassed 48 for the first time in six months showed that the Nasdaq 100 recorded an average return of 24.6% over the subsequent 11 months.

The fact that in all past cases where these conditions were met, the Nasdaq 100 had a 100% chance of rising after 12 months, suggests the possibility of a rally after a short-term correction.

According to Eleva Capital's analysis, high interest rates do not necessarily mean an economic contraction. They note that, in the long term, U.S. 10-year Treasury yields tend to move at a similar level to nominal GDP growth.

The current nominal GDP growth rate, combining 2.5% real GDP growth and 3% inflation, is 5.5%, which is considered the peak level for 10-year Treasury yields.

Compared to the 3% real interest rates during the 1990s IT cycle, the current level is lower at 2.25%. Therefore, it is difficult to conclude that we are in an era of high interest rates, as the current 10-year Treasury yield is lower than the 6% range of the 1990s.

According to CME FedWatch, an additional 100 basis points of interest rate hikes are expected by 2027, but the current 5% level of Treasury yields is perceived as an attractive investment, leading to increased capital inflow.

Indeed, capital inflow into TLT (long-term bond ETF) is rapidly increasing, reflecting expectations that long-term interest rates are likely to have peaked and will decline.

Banks possess the asset quality to absorb losses, indicating a low probability of a credit market crunch.

Loan growth rates of 6-7% are maintained, surpassing the nominal growth rate of 5.5%. Even in a high-interest rate environment, increasing loans support economic activity and maintain financial stability.

The Atlanta Fed predicts a real GDP growth of 4.4% in Q3, projecting over 2.1% growth year-over-year. The New York Fed also expects growth exceeding 2.2% in Q3 and 2.5% in Q4.

The probability of recession, based on the 10-year-3-month yield spread, has significantly dropped to the 15% range. The U.S. loan-to-deposit ratio remains stable below 72%, maintaining a stable lending environment, suggesting sustained economic growth despite rising interest rates.

According to FactSet, Q3 earnings growth is predicted at 28.7%, with full-year earnings growth for 2026 at 31.6% and next year's earnings growth at 15.1%, maintaining double-digit increases.

The 12-month forward expectation for the S&P 500 is 9,252 points, indicating a 22% upside potential from the current index level.

The 3-year average PEG ratios for the S&P 500 and Nasdaq 100 are very low compared to historical averages, suggesting that current IT sector valuations are undervalued.

Goldman Sachs' survey found that leveraged funds' Nasdaq 100 futures short positions surged to $80 billion, while long positions were around $20 billion.

Department Head Yoo Dong-won commented that even with a slowdown in frontier model development, the likelihood of a rapid downward revision of IT earnings forecasts is low, considering data center, inference, and memory demand. Wall Street analysis also views current market concerns about AI as exaggerated.

The statement from Amore CEO suggested verifying AI safety, not halting investment.

There is currently no evidence of downward revisions in AI CapEx forecasts or a slowdown in the performance of infrastructure companies. No signs of reduced data center or GPU investment have been observed either, so excessive fear about AI growth should be avoided.

According to JPMorgan, emerging market forward P/E ratios are: Philippines 10.5x, Indonesia 9.5x, South Korea 5.1x, Malaysia 14.1x, and China 10.6x. These are significant discounts compared to the 15-year average.

The KOSPI index's 3-year average PEG for 2026-2028 is 0.21, significantly lower than its 5-year average of 0.82. This confirms that KOSPI's valuation is substantially undervalued compared to major countries.

JPMorgan predicts a rapid acceleration in token demand as AI inference transitions to agentic AI. This will lead the memory industry into a 'higher for longer' upcycle that is longer and stronger than in the past.

The proportion of memory value is expected to significantly expand from 31% in 2026 to 50% in 2027 and 69% in 2028. Nomura forecasts global memory revenue to grow substantially from $270 billion in 2025 to $3.68 trillion in 2030.

The Taiex's 3-year average PEG is 0.53, a significant discount compared to its past average of 2.1.

The current PEG of the S&P 500 technology sector is 0.49, significantly lower than its past 5-year average of 2.08. This suggests that the technology sector may be undervalued if its earnings growth rate does not decline.