[Practical Finance] Interest Rate Stabilization and Earnings Support... Growth Stocks Prepare to Rise Again

[Image source=Yonhap News]

원본보기 아이콘

[Asia Economy Reporter Gong Byung-sun] Growth stocks are ready to run again. Employment data released last month and the global economic upturn are creating an environment favorable for investing in growth stocks.

On the 13th (local time), Adobe Systems, listed on the Nasdaq, closed at $605.01 (approximately 696,548 KRW). On the 7th, it even reached an all-time high of $607.53 during trading. The upward trend is also steep. Adobe's stock price, which closed at $556.95 on the 14th of last month, rose nearly $50 in a month. Apple, whose stock price had been sluggish this year, also rose more than $14 over the month to reach $145.64.

Growth stocks had a tough time in March this year. With concerns about the economy being overheated and tightening fears, interest rates surged. The U.S. 10-year Treasury yield, which started the year in the 0% range, rose to 1.744% on March 31.

Growth stocks also slumped in line with the rising interest rates. Adobe rose to $506.50 in February but fell to $420.78 on March 8. Other growth stocks showed similar trends. Payment service provider PayPal recorded $309.12 in February but dropped to $223.09 on March 5.

However, as interest rates stabilized downward, growth stocks regained their strong momentum. As of 9:46 a.m. on the 14th, the U.S. 10-year Treasury yield stood at 1.420%. Since the end of last month, it has been fluctuating slightly around the 1.4% level. On the 8th, it even recorded 1.294%.

The reason for the stabilization of interest rates is that the market accepted the rise in inflation indicators as temporary. In fact, inflation indicators continued to surge. The U.S. Consumer Price Index (CPI) for May rose 5.0% year-on-year, marking the highest level since August 2008. Nevertheless, global stock markets remained resilient. Jo Seung-bin, a researcher at Daishin Securities, explained, "The market's belief that the sharp rise in inflation will be temporary and the global economic recovery are supporting risk asset preference." Moreover, the global spread of the COVID-19 Delta variant has reinforced the downward pressure on interest rates.

The visible economic normalization is also a positive factor for growth stocks. On the 2nd, the U.S. Department of Labor released the June employment report. According to the report, nonfarm payrolls increased by 850,000, exceeding the forecast of 700,000. Employment in the leisure and hospitality sector rose by about 343,000 compared to the previous month, clearly benefiting from the vaccination effect.

While employment data is leading growth stocks, the manufacturing sector is supporting the global economy. The OECD business confidence index, which hit a low in May last year, has improved for 12 consecutive months and surpassed the high recorded in December 2017. Consumer sentiment is also positive for the global economy. Cash payments from the Biden administration's additional stimulus package and expanded vaccinations have encouraged people to consume. Combined with pent-up demand from COVID-19 restrictions, consumption is expected to continue increasing.

Growth stocks have already posted strong earnings in the second quarter of this year. Adobe's revenue for Q2 (March-May) was $3.84 billion, up 18.49% year-on-year. Adjusted earnings per share (EPS) rose 19.14% to $3.03. Tesla, which had been criticized for not delivering results relative to its growth potential, saw cumulative new car sales in the first half reach 386,050 units, a 115.6% increase year-on-year. Moon Nam-jung, a researcher at Daishin Securities, explained, "In the second half, inflation is expected to decline due to base effects, and unemployment rates, which have not yet returned to pre-COVID-19 levels, will further limit future interest rate concerns."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.