Will the U.S. stock market coexist with interest rates in the 5% range? AI and performance are the support

Nasdaq's highest even at 5.3% level for 10-year... Profit growth expectations absorb interest rate burden

Slowing employment and falling oil prices also support investor sentiment... A measure of sustainability in 3rd quarter performance

The U.S. stock market continues to be strong even with long-term interest rates in the 5% range. Although corporate financing costs have increased and there have been restrictions on stock valuation, expectations that profits will increase centered on artificial intelligence (AI) are supporting the buying trend. Whether companies can demonstrate these expectations with actual performance is a key variable that will continue the coexistence of high interest rates and rising stock markets.

On the 5th (local time), while the U.S. 10-year Treasury bond interest rate was trading in the 5.3% range, the Nasdaq Composite Index closed at an all-time high of 27,477.31, up 1.05%. The S&P 500 index also rose 0.66%. As large technology stocks rose, major indices also showed strength despite rising bond yields.

Monetary policy and energy prices also had a favorable effect on investment sentiment on this day. As the US September employment indicator released on the 2nd came out weaker than expected, the possibility of a further interest rate hike by the Federal Reserve in October decreased, and the decline in international oil prices also supported buying sentiment.

In an environment where long-term interest rates remain high, how much more a company can earn becomes important. As government bond interest rates rise, companies' borrowing costs increase, and the discount rate applied when calculating future profits in present value also increases. The structure is such that companies making the same profits are at a disadvantage in stock price evaluation. If profits increase quickly, this burden can be absorbed and stock prices have room to rise.

Market expectations for corporate performance are high. According to the LSEG tally reported by Reuters on the 5th, the profits of S&P 500 companies in the third quarter were expected to increase by more than 30% compared to the same period last year, and AI-related companies were expected to lead the increase. Although the performance is not yet confirmed, it shows the background in which investors are paying attention to growth companies even amid high interest rates.

There is also an analysis that profit forecasts have risen faster than stock prices. Brian Levitt, Invesco's chief global market strategist, pointed out in an analysis on the same day that even though stock prices have risen this year, the forward price-to-earnings ratio (PER), which compares stock prices to expected future profits, has decreased. He interpreted that profit growth supported the stock market even while interest rates limited stock valuation multiples.

Some say that the AI ​​boom is not greatly affected by interest rates. In a commentary provided by Reuters, Lisa Charlotte, Chief Investment Officer of Morgan Stanley Wealth Management, cited these characteristics and economic growth as the background for the stock market to maintain stability despite bond market instability.

However, the ability to withstand high interest rates varies from company to company. Invesco also pointed out that rising funding costs are putting pressure on vulnerable companies. This is why it is difficult to interpret the rise in the index as an adaptation of the entire market to high interest rates.

The third quarter results to be announced in the future are an opportunity to confirm this difference. If companies meet high profit expectations and growth spreads to other industries, the basis for supporting the strong stock market will expand. Conversely, if performance does not meet expectations, interest rate pressures may emerge again. This is a phase where we need to look at the speed of corporate profit growth along with the interest rate level.