As government bond yields in major global economies have risen recently, increasing market volatility, analysts in the securities industry said on the 7th that high rates do not, by themselves, create a negative backdrop for stocks.
Kim Jun-young of iM Securities said in a report that day, "The level of interest rates matters less than where rates stand relative to nominal growth," adding, "The current rise in rates has come alongside an increase in nominal growth, which combines inflation and growth."
Kim added that the stock market can shoulder this degree of rate-driven pressure. While a symbolic level like 5% on the U.S. 10-year Government Bonds could trigger a mechanical pullback as in the past, the decline is unlikely to be deep.
Kim said, "Rates would have to meaningfully exceed nominal growth to damage stocks' asset preference, and we are not there yet," adding, "Even with high rates, we are seeing growth that corresponds to them."
That still means rates are below nominal growth. Kim said, "Stock prices reflect nominal earnings, not real earnings," adding, "As long as inflation does not trigger demand destruction, higher prices actually expand profits."
However, he said rate-sensitive sectors require a selective approach. That is because assets with longer duration (the average period to recoup invested capital) remain more vulnerable to changes in discount rates.
He also said it is hard to attribute the recent weakness in the artificial intelligence (AI) industry solely to rising rates.
Kim said, "The AI value chain has moved in step with rising rates until now, so it is difficult to blame rates for the recent breakdown in that relationship," adding, "It is more reasonable to see it as a result of growing questions about the sustainability of its own cycle."
Historically, rising index earnings growth rates have been accompanied by higher interest rates. As the economy enters an expansion phase, rising rates can also be read as a rational outcome. On top of that, this time features an unusually large investment cycle.
Meanwhile, the macroeconomy is moving in a direction different from a downturn. Recent U.S. employment data beat expectations, suggesting the U.S. economy remains solid. Stocks did not fall sharply, and bond yields did not surge.
Kim said, "The prevailing view seems to be that while we are steering clear of recession, this does not lead to aggressive hikes," adding, "The U.S. market is showing a textbook case of rotation and broadening."
He continued, "It is true that interest rates are negative for growth stocks and the AI investment cycle, but because the economy is holding up, this is not an unambiguously negative setup for equities," adding, "We are likely entering a phase in which companies with visible numbers and growth begin to stand apart."
However, he said it is premature to assert that leaders such as semiconductors and other AI infrastructure plays are back in charge. Kim added, "Given that the probability of a hike in September has risen again to 60%, the rebound in semiconductors could be short," and "Be flexible in your approach, but the macro environment is too complex to have conviction."