‘This Signal Means Danger’: The Scenario That Has Korean Investors in U.S. Stocks on Edge as 10-Year Treasury Yield Tops 5.3%

U.S. 10-year Treasury yield hits highest level in 24 years

S&P 500, Nasdaq down less than 2% from record highs

Risk emerges if stubborn inflation keeps rates high and starts to hurt corporate earnings

The yield on the 10-year U.S. Treasury rose above 5.3%, reaching its highest level in 24 years, but brokerage analysts say the stock market is holding up better than expected. Corporate earnings are still growing, and hopes remain that easing geopolitical tensions could stabilize oil prices and inflation, reversing the recent surge in yields.

According to the financial investment industry, the 10-year Treasury yield touched 5.3420% intraday on Sept. 30. That was its highest level in more than 24 years, dating back to May 2002. The benchmark yield, which also serves as a key market interest-rate reference, stood at 3.962% on Feb. 27 and had climbed 1.281 percentage points over about seven months to 5.243% as of Oct. 1.

Higher yields are typically a negative for stocks, but Wall Street remains near record highs. The Standard & Poor’s 500 Index, which tracks 500 large U.S.-listed companies, closed at 7,666.45 on Oct. 1, down 1.70% from its all-time high of 7,798.99 set on Aug. 13. The tech-heavy Nasdaq Composite, which tends to have a stronger correlation with South Korea’s stock market, reached a record 27,244.28 on Sept. 22. It closed at 26,871.60 on Oct. 1, 1.37% below that peak.

Analysts point to corporate earnings as the first reason U.S. stocks have stayed near record levels despite elevated rates. Rising yields, higher oil prices and debate over whether artificial intelligence investment has peaked have weighed on valuations, but they have not damaged profits themselves.

“The most important factor in interpreting the U.S. stock market is corporate earnings,” said Kim Sung-hwan, an analyst at Shinhan Securities. “Earnings determine the trend in stock prices, and saying the market is entering a sustained bear market is effectively the same as saying earnings are heading lower.” The headwinds listed above may have made investors uncomfortable, he added, but they were not painful enough to break the market.

In fact, earnings estimates rose quickly even as share prices corrected. The S&P 500’s 12-month forward earnings-per-share estimate, which stood at 310 points at the start of the year, has now moved above 400 points. Shinhan Securities said it could reach 440 points by year-end if the pace of upward revisions continues.

Industries tied to AI investment have led earnings growth in particular. Since the start of the year, 12-month forward EPS for industries linked to AI capital expenditure, or CAPEX, has surged 107%. Those sectors accounted for 47% of the increase in total S&P 500 earnings. By contrast, earnings growth for industries unrelated to AI CAPEX was 16%.

“Recent increases in interest rates have had some impact on stock-market price-to-earnings multiple derating, but they have had almost no effect on EPS,” Kim said. “The speed of the move is a burden, but for now there are no signs that yields will hurt corporate earnings in the short term or that the market is especially vulnerable to that risk.”

Analysts also argue that high rates will not easily curb AI investment. U.S. companies’ interest expense as a share of sales stands at 1.2%, the lowest level on record. Big Tech, the main force behind AI investment, is spending not to take advantage of low borrowing costs but to secure market leadership.

“The Big Tech companies that have been the main driver of recent debt expansion did not ramp up AI CAPEX simply because rates were low,” Kim said. “They are in a fight for survival, and their growth rates are steep, so this is not a setup in which high rates can restrain investment.”

There is also hope that current yields in the 5% range will not last for long. KB Securities said the key reason stocks have not sharply broken down despite the jump in 10-year yields lies in the inflation outlook.

“The key reason the market has not given up hope despite the surge in Treasury yields is the inflation outlook,” said Lee Eun-taek, an analyst at KB Securities. “Economists’ medium- to long-term CPI forecasts mostly show inflation slowing again after the fourth quarter and returning to the 2% range in the first half of next year.”

If inflation slows again, the current spike in yields may not last long, he said. If the market is now at the peak, it would be hard to significantly reduce exposure to both stocks and bonds.

If yields reverse direction, the decline could accelerate. Institutional money that trades U.S. Treasuries according to preset rules, similar to program trading in equities, is currently tilted toward heavy selling. If those positions are unwound as oil prices and yields change course, that could trigger a sharp rise in bond prices and a drop in yields.

Ultimately, analysts say the real warning sign for U.S. equities is not the 10-year Treasury yield at 5.3% itself. The greater risk is a scenario in which high rates and inflation persist long enough to start eroding corporate earnings.

“If geopolitical risks are not contained, international oil prices climb back above $100, and inflation shifts from demand-driven to cost-push, that would threaten the positive scenario for the U.S. stock market,” Kim said.

Lee said a further jump in Treasury yields accompanied by a renewed rise in inflation expectations would leave the market unable to hold on to its current optimism.

Han Kyung-woo, Hankyung.com reporter case@hankyung.com