After First Fed Rate Hike in Three Years, "What About My Stocks?"... Key Profit Variable Is 'AI Investment' [Weekend Money]

Fed Raises Rates for First Time in Over 3 Years
Earnings Growth Outpaces Rate Hikes
AI and Power Investment Cycle Continues

Reuters Yonhap News

With the U.S. Federal Reserve (Fed) raising its benchmark interest rate by 25 basis points (1bp = 0.01 percentage point) for the first time in three years and two months, concerns over interest rate pressure in the U.S. stock market are mounting once again. However, analysts noted that the market has already priced in a significant portion of additional rate hikes, and that the financial health of companies, particularly big tech firms, remains robust, meaning that the artificial intelligence (AI) investment cycle is expected to continue.

According to Samsung Securities, this rate hike was a decision broadly anticipated by the market. However, rising oil prices and the strong growth trend of the U.S. economy have led the Fed to take a hawkish stance regarding future rate paths, which is considered a variable. Samsung Securities forecasts one more rate hike in December this year, followed by two rate cuts by the end of next year.

Hyeran Park, a research analyst at Samsung Securities, noted, "The most significant constraint on the current market sentiment is the concern over prolonged inflation and a rise in long-term interest rates." However, she predicted that since the Fed has demonstrated its willingness to curb inflation through both the latest rate hike and signaling the possibility of additional increases, the term premium—which has driven bond yields higher—will likely ease.

Notably, market rates have already priced in approximately 1.4 rate hikes within the year, suggesting that further upward pressure on bond yields is not expected to be significant. This implies that the valuation pressure on the stock market from higher interest rates could gradually diminish.

The interest rate rise impacts the stock market through two major channels: First, when rates rise, the discount rate applied to future corporate values increases, and second, the cost of funding for companies goes up, potentially reducing both profits and investment capacity. This has raised concerns that industries such as AI—which require substantial capital expenditures (CAPEX)—could face a heavier burden.

However, Samsung Securities believes that the recent rate hike will not disrupt the ongoing AI investment cycle. The rationale is that if the climb in bond yields stabilizes, there will be only limited downside risk for valuation indicators such as price-to-earnings ratio (PER). Given that multiple compression has been underway since October of last year, the probability of further sharp contraction is deemed low.

Researcher Park stated, "Clearly, it is now less convenient for companies to raise funds than before due to the rate hike," but added, "This will not impede the pace of investment." She explained that not only is the financial soundness of big tech firms, who are leading AI investments, highly stable, but the debt ratios of other companies also remain robust.

In fact, Samsung Securities analyzed that despite aggressive rate hikes since 2022, corporate profits have grown substantially, thereby strengthening their interest repayment capacity. The financial health of U.S. S&P500 firms was also evaluated as outstanding.

Analysis also suggests that as long as both the broader economy and corporate earnings are growing together, interest rate increases do not necessarily result in negative outcomes for the stock market. Historical case studies by Samsung Securities indicate that, during periods when rate hikes occurred alongside economic growth, equity market performance sometimes exceeded that seen during rate cuts.

However, as it is not possible to completely ignore the pressure from higher rates, the report emphasized the need to be selective and focus on sectors with strong profit growth, rather than approaching all industries in the same way.

Samsung Securities highlighted information technology (IT) and industrials as sectors to watch. Among industrials, power equipment and machinery segments were particularly favored. With ongoing investment in power infrastructure driven by the expansion of AI data centers, the earnings growth of related companies is seen as a key driver of their stock prices.

The outlook for corporate profit growth remains positive over the medium to long term. According to Samsung Securities, the earnings per share (EPS) of S&P500 firms is projected to continue its upward trajectory beyond 2026, with strong profit growth expected through 2028.

Researcher Park concluded, "Ultimately, the core variable in this round of rate hikes will be 'profit growth that can withstand higher rates,' rather than the rate itself." She added, "If corporate investment, led by AI, continues and earnings growth persists despite lingering rate pressure, risk appetite in the U.S. stock market can be sustained."

This content was produced with the assistance of AI translation services.