Introduction
TREE NEWS reports: As US stocks continue to defy gravity despite rising Treasury yields, investors have been fixated on the question of how high yields can go before equities buckle. But according to Bloomberg macro strategist Simon White, that is the wrong question. The real signal to watch, he argues, is semiconductor export data from South Korea and Taiwan, which historically leads the capital expenditure cycle by three to six months. A sharp decline in these exports would warn of an impending peak in tech capex, triggering a downgrade in earnings expectations and leaving stocks vulnerable in a high-yield environment. For now, the data shows no sign of an imminent reversal.
Why Yields Haven’t Crushed Stocks (Yet)
The resilience of the stock market in the face of rising yields is largely due to the explosive growth in earnings expectations. The projected three-year forward earnings for the S&P 500 are growing at an annual rate of 40%, far outpacing the negative effect of higher discount rates on present values. Meanwhile, the implied equity risk premium, as calculated by NYU Stern professor Aswath Damodaran, stands at 3.67%. Combined with Treasury yields, the expected return on the S&P 500 has climbed to nearly 9%, explaining why equities have held up.
Moreover, the rise in nominal yields has been driven almost entirely by real rates, not inflation expectations. This distinction matters: rising real rates reflect stronger-than-expected economic growth, which is far less harmful to stocks than a rise driven by inflation fears, which would signal fiscal risk and directly hit earnings expectations. On relative valuation, US equities are only moderately overvalued versus Treasuries, and while higher yields have compressed forward P/E multiples, strong revenue and margin growth have filled the gap.
The Crucial Role of Earnings Expectations
The market’s current strength hinges on earnings expectations remaining at these elevated levels. The 40% growth rate in three-year forward earnings is unprecedented in historical data. It is large enough to offset the loss from higher discount rates and keep the implied equity risk premium positive. However, these expectations are heavily concentrated in the AI capex-driven growth narrative. If the tech capex cycle begins to cool, a rapid downgrade in earnings expectations would leave stocks suddenly vulnerable with yields above 5%. High valuations would then face both a lack of earnings support and the weight of high discount rates.
Why Asian Chip Exports Are the Key Indicator
Traditional methods of gauging the capex cycle—analyst forecasts or individual company announcements—are flawed. Analyst predictions lag, and single-company announcements have low predictive power. In contrast, export data from South Korea and Taiwan are natural leading indicators. Any systemic contraction in capex will show up in these export figures first, with a lead time of about three to six months.
The data is also timely: exports are released monthly at the beginning of each month, and South Korea additionally provides a first-20-day export estimate around the 21st of each month, offering a higher-frequency tracking window.
When chip exports start to decline, the impact will be twofold. First, it will directly pressure earnings expectations, weighing on stocks in a high-yield environment. Second, because chip exports lead nominal GDP, a downgrade in real growth expectations would push yields lower. The exact sequence is uncertain—a capex shock could hit both stocks and yields simultaneously, or it could first crush earnings expectations and then allow the high-yield pressure to fully manifest.
Key Takeaways for Investors
- Watch Asian chip exports closely: Monthly export data from South Korea and Taiwan serve as a reliable leading indicator of the global tech capex cycle and, by extension, US equity earnings expectations.
- Earnings expectations are the linchpin: The current bull market rests on unprecedented earnings growth. Any sign of a slowdown in AI-driven capex could trigger a sharp reassessment.
- Yields are a secondary concern: The level of Treasury yields is less important than the direction of earnings. A shift in earnings expectations could turn high yields from a background noise into a major headwind.
- Monitor the semiconductor supply chain: South Korea’s 20-day export estimates, released around the 21st of each month, provide an early warning signal for potential market turbulence.
