With Chair Kevin Warsh of the U.S. Federal Reserve (Fed) reopening the possibility of a rate hike at Jackson Hole, an analysis said Korea's stock market also needs to change its investment strategy. Rather than waiting for rate cuts, investors should focus on stocks with clear earnings growth.
There is an outlook that, compared with interest rate–sensitive high-PER (price-to-earnings ratio) growth stocks, semiconductors, high-bandwidth memory (HBM), and power infrastructure tied to artificial intelligence (AI) data centers could be relatively favorable.
On the 31st, Kim Doo-eon, a researcher at Hana Securities, said in a report, "What changed at Jackson Hole was not the rate outlook but investors' questions," adding, "Now the question is, 'Which corporations' profits can withstand higher rates?'"
Warsh did not directly declare a rate hike at Jackson Hole. Instead, by stressing that further action would be needed if inflation does not settle quickly enough, markets took his remarks as a signal for higher rates.
Warsh said, "We need confidence that underlying inflation is moving clearly and fast enough toward the 2% target. If not, there is more work to do."
Markets immediately priced in a higher chance of a rate hike. The probability of the Federal Open Market Committee (FOMC) raising the policy rate by 25 bp (1 bp = 0.01 percentage point) in September rose to 57% from 35% before Jackson Hole. The U.S. 2-year Government Bonds yield also jumped from 4.22% to 4.35%.
Kim said, "Warsh did not promise a hike in September," adding, "But at the very least, he broke the market's belief that a 'hold is the default.'"
The possibility that the Fed's 'forward guidance'—pre-signaling the future rate path—will weaken is another factor heightening market volatility. Citing the so-called 'Hall of Mirrors' problem, in which markets watch the Fed and then the Fed references financial market prices, Warsh emphasized that he is committed to "discipline," not "decision."
Hana Securities sees a growing chance that, rather than pre-committing to a rate path, the Fed will change its judgment based on shifts in economic indicators such as inflation and employment. As a result, it said, it will become harder for investors to predict future rates based solely on Fed remarks, and rate volatility could rise compared with before.
In the stock market, attention is on the fact that expanded AI investment can be a "double-edged sword." Capital and intangible investment by U.S. corporations is up about 9% from a year earlier, the highest growth rate since 2021, and more than half of this year's increase in capital expenditures (CAPEX) is coming from AI buildouts. S&P 500 corporations' earnings also rose more than 20% over the past year.
The point is that while AI investment lifts the earnings of semiconductor and data center corporations, it can also keep the U.S. economy and financial conditions stronger than expected, giving the Fed grounds not to cut rates—or even to raise them. Kim analyzed, "The old formula that the stronger the AI investment, the more rates will fall may no longer hold."
Accordingly, in Korea's stock market, a strategy of selecting corporations whose earnings per share (EPS) are rising quickly is seen as more necessary than betting on rate declines themselves. It explained that the burden could grow for high-PER stocks vulnerable to high rates or for growth stocks that are not yet profitable.
By contrast, the relative appeal is expected to hold for semiconductors and HBM, whose earnings are rising enough to withstand high rates, and for power equipment, transformers, cables, cooling, and data center infrastructure sectors that resolve physical bottlenecks as AI investment expands.
Kim said, "Warsh did not change the direction of rates; he changed the market's grammar for looking at rates," adding, "From now on, the market needs to judge the numbers on inflation, the economy, and financial markets directly, rather than predicting the Fed."