[The Truth Behind the Stock Market Plunge] Why Did AI and Semiconductor Stocks with Excellent Performance Fall? Explaining the Mechanism of Interest Rates and P/E Ratios

Reference Video: [Wealth Route Asset Growth Guide] The Mechanism of Rising Interest Rates and Stock Prices! The Truth About the P/E Ratio Decline That Hit AI Stocks with Excellent Performance

Recently, AI-related and semiconductor stocks have fallen significantly, and many of you may be feeling anxious, wondering, “Why are they falling when they are growing so much?”

In fact, the earning power of AI companies themselves is still excellent. Despite this, there is a clear mechanism behind the stock price decline: “rising interest rates” and “declining P/E (expectation) ratios.” exists.

In this article, based on the content of the video, I have organized the reasons for the stock market plunge and the future outlook in an easy-to-understand manner.

1. Corporate performance is excellent! The biggest cause of the decline is “interest rates”

The performance and earning power of major AI and semiconductor companies such as NVIDIA, Meta, Microsoft, and Micron remain very strong.

However, no matter how wonderful a super-growth stock is, it cannot go against the rise in global interest rates. This stock price decline is not because corporate performance has deteriorated, but the result of taking the damage from rising interest rates head-on.

2. The equation that determines stock prices and “multiple contraction”

The following basic equation is important for understanding how stock prices work.

$$text{Stock Price} = text{EPS (Corporate Earning Power)} times text{P/E Ratio (Investor Expectations)}$$

• Low interest rate era: Expectations for the stock market were high, and stocks were bought at very high levels, such as a P/E ratio of 40x.

• Currently: Even for major growth companies like NVIDIA, the P/E ratio has shrunk to around 20-30x.

This phenomenon, where the company’s own earning power (EPS) remains solid but the balloon of investor expectations (P/E ratio) deflates due to rising interest rates, is technically called “multiple contraction.”

Why does the P/E ratio (expectations) fall when interest rates rise?

When interest rates rise, you can earn decent interest even from risk-free bank deposits or government bonds. As a result, investors become calm, thinking, “There is no need to go out of my way to take risks and buy stocks at a high price (high P/E ratio),” and expectations for stocks fall.

3. The key point for a market reversal is the “US 10-year Treasury yield of 4.8%”

So, when will the market for AI and semiconductor stocks become active again?

One major benchmark is the US 10-year Treasury yield.

Analyzing the timing of large-scale corporate bond issuance by past mega-tech companies (Alphabet, Amazon, NVIDIA, etc.), if interest rates are below a certain level, companies can actively raise funds to proceed with capital investment in data centers, GPUs, etc.

• Benchmark level: US 10-year Treasury yield 4.8% or less

• Current Status: After rising to nearly 5.4%, it has been hovering around 5.1%.

If interest rates settle down to 4.8% or lower, it will become easier for companies to raise funds, and it is expected that the investment cycle will become active again, bringing brightness back to the market.

4. Background of Rising Interest Rates

The background to the rise in interest rates this time includes inflation concerns due to rising crude oil prices and soaring logistics costs associated with issues such as the Strait of Hormuz.

When interest rates remain high to curb inflation, it becomes difficult for companies to raise investment funds through bank loans or corporate bond issuance, which has had a restrictive effect on stock prices as a result.

5. Future Investment Stance and Summary

Based on this decline, the following three points are key for the future.

1. Wait patiently for the interest rate trend to change

   1. Most of the bad news has already been largely priced into the stock market.

2. Believe in the fundamental ‘earning power (EPS)’ of AI companies

   1. Expectations (P/E ratio) have shrunk, but the substance of the companies (EPS) remains brilliant. It can be said that it is a state where ‘the price has become realistic while the substance remains the same’.

3. Do not be swayed by excessive pessimism

   1. It is important to assess the growth potential at the base of the company without being misled by sensational voices predicting ‘further crashes’.

Learn more in the video

Understanding the relationship between interest rates and stock prices will significantly change how you perceive daily economic news. The video explains more specific examples and chart perspectives, so please be sure to watch the original video as well.