Is a 5% Interest Rate Sustainable? "High U.S. Growth and AI Profitability Offset Shock"

Different from the 2023 Rate Shock

Profit Growth More Crucial Than Rate Levels

Focus on Large Blue-Chip Stocks With Strong Cash Generation

Although the yield on the 10-year U.S. Treasury has surpassed 5%, ushering in a prolonged high interest rate environment, both the U.S. economy and investments in artificial intelligence (AI) technology continue to demonstrate solid growth. Market attention is shifting beyond the straightforward pressure of interest rates toward the actual profitability generated by the AI ecosystem, and whether bottlenecks in power and infrastructure supply can be resolved. The securities industry has assessed that the current breach of 5% in long-term interest rates does not need to be considered on par with past episodes of stagflation or fears of an economic downturn.

According to Daishin Securities on October 1, unlike the correction of around -10% seen in the stock market during the October 2023 rate shock, there has been no significant correction this year. Back then, long-term interest rates surged in the context of high recession fears, exacerbating concerns about the economic outlook; in contrast, current worries about recession are minimal. The MOVE Index, which measures bond market volatility, is also showing a stable trend.

As of the second quarter of this year, the nominal growth rate for the U.S. stood at 6.5%. Considering this shift, a 5% yield on the 10-year U.S. Treasury is seen as fully justifiable under current economic conditions. Furthermore, the long-term average for U.S. long-term bond yields is between 4% and 5%, with the long-term average for the consumer price index (CPI) also hovering around 3%. The 2010s were a period of exceptionally low inflation and interest rates, but now rather than entering a new normal, the market is returning to a typical level.

In particular, AI, which is currently leading U.S. economic growth, is not a sector highly sensitive to interest rates. Sectors sensitive to interest rates have already been lackluster, meaning that even with recent increases in market and policy rates, there is little immediate risk of a downturn in the U.S. economy.

The principal cause of increased volatility in the stock market due to rising long-term interest rates has been doubts over whether major big tech firms can sustain their investments in AI. Hyperscalers have actively ramped up bond issuance this year to fund investments that exceed their free cash flow (FCF). While concerns have been raised that large-scale bond issuances could push up market interest rates, increase interest expenses, and eventually result in reduced investment, it is judged that—except for Oracle—the financial soundness and substantial cash generation capability of hyperscalers make it unlikely that these will pose a severe burden.

Eugene Investment & Securities likewise emphasized that rising rates largely reflect robust economic growth, and that the pace of improvement in corporate profitability is more important than the absolute level of rates. In particular, there is no clear evidence that a 5% yield on the 10-year U.S. Treasury acts as a tipping point, and historically, stock market valuations have been maintained even with yields as high as 5.5~6.0%. Compared to the 2000s and 2010s, both the U.S. and Europe currently have higher nominal economic growth, and even compared to July 2007—when yields exceeded 5%—the current real growth rate is higher by 0.2 percentage points while inflation is up by 0.7 percentage points.

The key variable determining stock market valuations is profit growth expectations rather than interest rates. When profit growth rates for U.S. companies exceed 14%, a strong positive correlation emerges; corporate profitability is improving much more rapidly than the pace at which the 10-year Treasury yield is rising. Recent concerns about construction delays at AI data centers originate not from softening demand, but from supply-side bottlenecks such as power supply and licensing, meaning that market worries about a slowdown in AI momentum are seen as excessive.

Going forward, if high interest rates persist, market capital is expected to concentrate in large blue-chip stocks that can demonstrate strong profitability and cash generation capacity. Jonghun Lee, a researcher at Daishin Securities, advised, "Once interest rates stabilize to some degree, market attention will again shift to whether the AI ecosystem can prove both its high growth potential and monetization capabilities."

Jaehwan Heo, a researcher at Eugene Investment & Securities, stated, "The higher rates climb, the more limited the expansion into small and mid-cap stocks becomes, concentrating capital on a handful of large-cap stocks. Given their pricing power and high pace of profit growth, technology and energy are more advantageous than consumer goods. For the domestic stock market, we recommend semiconductors, securities, shipbuilding, and energy—sectors with high profitability, such as return on equity (ROE), that can offset rate pressures and carry relatively low valuation risk."

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